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GOOD LOCAL GOVERNANCE:
A Key to Economic Growth
Government agencies and donors working in private sector development
in Vietnam have conducted several studies in recent years to
understand the drivers and constraints for economic growth in
specific cities and provinces. These studies find that marked
differences can exist between cities and provinces in their business
environments and the development of private sector businesses. The
differences often stem from physical factors such as quality of
infrastructure, geographic location, distance to major markets,
availability of finance and human resources. However, the studies
show that local governance and regulatory issues should also be
taken into account.
This issue of the Bulletin portrays the kind of impact that local
governance can have on the growth of the private sector, which
should assist local governments in improving the environment for the
business sector in their locale, resulting in improved economic
performance.1
There
are major differences in economic growth between localities.
While a number of cities
and provinces have grown rapidly since the start of doi moi,
otherswith similar conditions in terms of geographic location and
infrastructurehave grown at slower pace. And the resulting gap in
economic prosperity has tended to widen. For example, despite having
broadly equal infrastructure and proximity to seaports and major
markets, the economic growth in four southern provinces (Dong Nai,
Binh Duong, Long and Ba Ria - Vung Tau) has been far better than in
seven northern provinces (Quang Ninh, Hai Duong, Hung Yen, Hay Tay,
Bac Ninh, Bac Giang and Vinh Phuc). (See H.1).
|
Select
economic comparisons of seven northern and four
southern provinces |
| |
Northern
7 |
Southern
4 |
|
Population (millions) |
10 |
5 |
|
Export
per capita
|
$ 50 |
$ 785 |
|
Implemented FDI per capita |
$ 60 |
$ 570 |
|
Enterprise Law investment per capita |
$ 84 |
$ 103 |
|
The graph (H.2) below
summarizes initial findings from a competitiveness index currently
being developed compares economic growth between provinces, taking
into account five major initial factors: distance from major
markets, quality of infrastructure, availability of human capital,
use of information technology and availability of land.
Source: VNCI, presented at the Technical Workshop on
Enterprise Growth Initiatives, July 19, 2004 |
The graph raises questions
as to what causes provinces with similar competitiveness to have
such differing growth rates (what explains the gap between Binh
Duong and Nghe An for example)2. One likely explanation
coming from the recent studies is that local governance and the
regulatory framework affects the pace of private sector development
and economic growth. This can be further broken down into a number
of specific issues.
1. Local
resource management has a direct impact on each province's
attractiveness to investment
The studies found that
access to basic resources such as land, credit, and infrastructure
(including electricity and water), influences investors' decisions
of where to locate their businesses. Taking land as an example, in
most surveyed provinces, about 70% of businesses said that they
would expand production activities if they could access land more
easily. Taken as two distinct groups, provinces in the North tend to
limit the conversion of agricultural land into non-farm uses, while
most southern provinces have proactively made more conversions. As a
result, there is a greater shortage of land available for industrial
purposes in the North, thereby making land acquisition in the North
out of reach for many enterprises.
The reality is that many enterprises use residential land for their
business, which is even more expensive. In Bac Ninh province,
located 30 km from Ha Noi and accessible by a good road, residential
land prices are as high as $2,000/m2. By comparison, prices for
residential land in Dong Nai province, 50 km from Ho Chi Minh City
and also along a good road, are only about $10/m2. This is even more
striking considering the fact that average incomes in Dong Nai are
higher than in Bac Ninh. These disparities in land prices partly
explain why the business sector in Bac Ninh is less developed than
in Dong Nai.
2.
Transparency and accountability of local public management can
affect business transaction costs and investor confidence
In interviews, many
business owners mentioned the time-consuming and costly
administrative procedures in their localities for inspections,
licensing, land allocation, etc. These procedures all lead to higher
transaction costs for companies. Minimizing them through more
transparency and accountability will certainly help businesses
perform more efficiently.
Public agencies in some localities have yet to function in ways that
create a fair and conducive environment for business. The studies
revealed that local businesses tend not to resolve disputes through
local courts, as the process is considered cumbersome and time
consuming. In addition, entrepreneurs lack confidence in the
fairness and enforceability of court judgments. Improving the
capacity and accountability of local public agencies could help
create a more transparent and safe environment for businesses to
grow.
3.
Dynamism of local governments can support business development
In cases where a policy,
law or regulation issued by the central government is vague, local
authorities may have a range of reactions, including: i)
interpreting the law in a way that hinders business activity; ii)
doing nothing and/or waiting for more detailed guidance from the
central government, or iii) interpreting the law in a way that is
supportive to businesses. Private companies reported that they
highly appreciate the dynamism of local governments in some southern
provinces (including Ho Chi Minh City, Da Nang, Binh Duong, Dong Nai
and Long An) that tend to interpret and implement policies in ways
that are broadly supportive of businesses. Conversely, private
businesses in some northern provinces (including Ha Tay, Nam Dinh
and Thanh Hoa) said that local authorities tend to be more
conservative, and as a consequence the private sector is less
dynamic and prosperous.
4. SOE
favoritism can impede the private sector
Some government officials
interviewed in provinces such as Nam Dinh and Ha Tay stated that
SOEs are the driving force behind local economic development, which
consequently contributes to private sector growth. Managers of a
number of large private firms, however, claim that they face unfair
competition from SOEs, which have better access to incentives and
resources such as land, bank credit and government procurement
contracts. Entrepreneurs feel that this lack of a 'level playing
field' hinders private sector growth. In provinces where subsidies
to SOEs have been reduced significantly (such as Dong Nai and Long
An) private firms have developed more rapidly.
5.
Investment incentives are not necessarily the best way to attract
investment
Some localities give
special investment incentives as a way of competing with others in
attracting investment. The downside of investment incentives is that
they are often not sustainable, and can be inconsistent with
national policy. In addition, incentives can adversely impact tax
revenues both at provincial and central levels. Therefore, local
investment incentives should be used with care, taking into account
their utility and sustainability.
(1) See Edmund Malesky, 'Enterpreuners
on the Periphery', MPDF Private Sector Discussion Paper No. 16, July
2004, and Nguyen Dinh Cung, Pham Anh Tuan, Bui Van and David Dapice,
'History or Policy: Why Don't Northern Provinces Grow Faster?' CIEM
and UNDP, May 2004.
(2) VNCI is currently developing a competitiveness index for 46
provinces in Vietnam that will be published in early 2005. The red
line in the graph represents the GDP growth that might be expected
based solely on the five major conditions mentioned above. The dots
above the line represent those provinces that have grown at a rate
faster than expected, while the dots below the line represent
provinces that grew at a slower pace than expected. |
