VNCI Policy Paper # 13, Summary report THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008 MEASURING ECONOMIC GOVERNANCE FOR PRIVATE SECTOR DEVELOPMENT
VNCI Policy Paper # 13, Summary report
THE VIETNAM PROVINCIALCOMPETITIVENESS INDEX 2008
MEASURING ECONOMIC GOVERNANCEFOR PRIVATE SECTOR DEVELOPMENT
Founded in 1963, the Vietnam Chamber of Commerce and Industry (VCCI) is a national organization that assem-bles and represents the business community, employers, and business associations of all economic sectors inVietnam.The mission of VCCI is to protect and assist business enterprises, to contribute to the socio-econom-ic development of the country, and to promote economic, commercial, and technological cooperation betweenVietnam and other countries in the world.
VCCI's two main functions are: (i) representing the Vietnamese business community through the promotion andprotection of the lawful, legitimate interests of Vietnamese enterprises and employers in domestic and interna-tional relations; and (ii) promoting the development of business enterprises, facilitating cooperation among busi-ness entities, and offering assistance in trade and investment, economic and technical cooperation as well asother business activities of enterprises in Vietnam and abroad.
International Trade Centre9 Dao Duy Anh, Hanoi,Vietnam
Tel: (84-4) 3574-2022Fax: (84-4) 3577-0632
www.vcci.com.vn
VNCI is a USAID-funded project that provides technical assistance to improve the business enabling environ-ment in top priority areas for government and business leaders.VNCI's programs include: (i) policy advocacyusing the PCI data and other policy activities that assist the government and business sector to improve deci-sion-making and policy-making to achieve optimal economic performance and promote participation and trans-parency; (ii) regulatory reform responding to the Prime Minister-led Decision 30 Master Plan to SimplifyAdministrative Procedures, supporting the Office of the Government to design and implement reform strategiesto clean up the existing stock of regulations, apply regulatory quality control, and develop an effective regulato-ry framework and policy coordination; (iii) infrastructure financing through revenue-backed bonds that leveragefinancial markets to support the financing of a wide range of infrastructure projects through an effective andtransparent financing tool which takes the burden off the Government budget; (iv) TIGER (Transformation inGovernance through Economic Reform) using performance-based management systems that enable provincialleaders to monitor and improve economic governance reforms; and (v) provincial reform activities that respondto specific requests from reform-minded provinces that aspire to improve economic governance.
Unit 02, 15th floor, Prime Centre Building53 Quang Trung street, Hanoi,Vietnam
Tel: (84-4) 3943-8163Fax: (84-4) 3943-8160
www.vnci.org
Visit www.pcivietnam.org to download this repost and the PCI data
THE VIETNAM PROVINCIALCOMPETITIVENESS INDEX 2008MEASURING ECONOMIC GOVERNANCE
FOR PRIVATE SECTOR DEVELOPMENT
Primary Author and Lead Researcher:
Dr. Edmund Malesky
Research Team:
Tran Huu Huynh
Dau Anh Tuan
Le Thanh Ha
Le Thu Hien
Nguyen Ngoc Lan
3THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
FOREWORD
The Provincial Competitiveness Index (PCI) is designed to assess and rank the performance, capacity andwillingness of provincial governments to develop business-friendly regulatory environments for private sectordevelopment.The fourth iteration, PCI 2008, once again validates that economic governance does matter. Ateach level of initial conditions, better-governed provinces are able to not only use their endowments moreefficiently but also influence business performance and income in subsequent years.
Due to its widespread acceptance, there have been many practical applications of the PCI reports andanalyses. Provincial governments find it a reflection of their respective provinces' strengths and weaknesses, apressure for reforms and a source of best practices for replication. In the past year, over 40 provinces andstate agencies have used the PCI to engage in public-private dialogue and diagnostic analysis with the localcommunities to better understand the competitive factors that drive economic growth. Investors use theindex as reference for their investment decision-making and advocacy for local initiatives.
This PCI 2008 report also introduces a new provincial analysis of infrastructure which is a critical factoraffecting access to markets, transaction costs, and economic growth and the overall competitiveness of theinvestment environment in Vietnam. Its policy implications offer for government planners, provincial andbusiness leaders important insights and recommendations on how to tackle the major obstacles created byout-dated and inadequate infrastructure that affects all enterprises.
The next phase of the PCI initiative should focus on using this valuable tool to stimulate dialogue and focuspriority actions on national and provincial strategies to create higher value-added industries and clusters ofgoods and services in different parts of the country based on their natural comparative advantages.
We hope this publication will serve as a useful resource for business associations, government and businessleaders, academic and research institutes, donor agencies, and the media as they seek to improve the qualityof economic governance throughout Vietnam's provinces.Vietnam Competitiveness Initiative and VietnamChamber of Commerce & Industry are ready to be your partners to improve the socio-economicdevelopment of Vietnam.
JJaammeess PPaacckkaarrdd WWiinnkklleerr,, PPhh..DD
DirectorVietnam Competitiveness Initiative
VVuu TTiieenn LLoocc,, PPhh..DD
ChairmanVietnam Chamber of Commerce & Industry
5THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
ACKNOWLEDGEMENTS
The Provincial Competitiveness Index 2008 is the result of a major, ongoing collaborative effort between theVietnam Chamber of Commerce and Industry (VCCI) and the U.S. Agency for International Development(USAID)-funded Vietnam Competitiveness Initiative (VNCI), managed by DAI, with a substantial contributionby VNCI partner The Asia Foundation (TAF).
Edmund Malesky of the University of California - San Diego led the development of the PCI's researchmethodology and authored the presentation of its analytical findings.
Professor Malesky was supported by a PCI research team that included Tran Huu Huynh, Deputy SecretaryGeneral and Director of the Legal Department at VCCI; Dau Anh Tuan, Le Thanh Ha and Nguyen Le Ha ofVCCI; Le Thu Hien, Nguyen Ngoc Lan, and Trinh Thi Hang of VNCI; Nina Merchant and Nguyen Thu Hangof TAF; and Paul Schuler of the University of California - San Diego. David Brunell, Jr., and Anne Le providedvaluable inputs to the PCI construction and analysis.
Do Hoang Anh,VNCI Deputy Project Director provided comments and Steve Parker of DAI served as thereport's expert reviewer.
The PCI was developed under the overall leadership of Vu Tien Loc, Chairman of VCCI, James Packard Winkler,VNCI Project Director, and benefited from the assistance and input provided by David Brunell, Director ofEconomic Growth for USAID, and Kim Ngoc Bao Ninh,Vietnam Representative of The Asia Foundation.
Suggested citation when referencing report or data: Malesky, Edmund. 2008. "The Vietnam ProvincialCompetitiveness Index: Measuring Economic Governance for Private Sector Development. 2008 Final Report."Vietnam Competitiveness Initiative Policy Paper #13. Vietnam Chamber of Commerce and Industry (VCCI) andUnited States Agency for International Development's Vietnam Competitiveness Inititative (VNCI): Ha Noi,Vietnam.
6 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
The PCI research team extends special thanks to our expert advisory panel, who provided valuable insightson methodology and indicator selection.
Mme. Pham Chi Lan Member, Institute of Development Studies
Mr.Vu Quoc Tuan President, Association of Vietnamese Trade Villages
Mr. Nguyen Dinh Cung Director of Macroeconomics, Central Institute for Economic Management
Mr. Nguyen Minh Man Director of State Administration and Civil Service Department, Office of theGovernment
Mr. Le Dang Doanh Member, Institute of Development Studies
Mr.Vu Duy Thai President, Ha Noi Union Association of Industry and Commerce
Mr. Cao Sy Kiem President, Association of Vietnamese Small and Medium Sized Enterprises
Mr. Nguyen Van Thoi National Assembly Member and Director of the Thai Nguyen Joint-StockExport Company
Mr.Vu Thanh Tu Anh Director of Research, Harvard Fulbright Economics Teaching Program, Ho ChiMinh City
Mr.Vo Hung Dung Director,VCCI Can Tho
Mr. Nguyen Ngoc Phi Chairman, People’s Committee of Vinh Phuc
Mr. Nguyen Van Tu Vice Director of Planning and Investment, Ha Tay (Ha Noi)
Mr. Pham Phuong Bac Vice Director of Planning and Investment, Bac Ninh
Mr. Nguyen Thai Son Senior Expert of the Government and Member of the Committee forImplementation of the Enterprise Law and Investment Law
Mr. Cao Ba Khoat Economist, Director of the K & Associates Consulting
Mr. Phan Duc Hieu Economist, Central Institute for Economic Management
Mr.Vu Quoc Huy Economist, National Economics University and Support for Trade AccelerationVietnam (STAR) Project
Mme. Pham Thi Thu Hang Director, Center for Supporting Small and Medium Sized Enterprises,VCCI
Mr. Pham Duy Nghia Legal Department, National University of Ha Noi
Mr. Le Duy Binh Economist, German Technical Cooperation
Mr. Nguyen Van Lan Economist, Mekong Private Sector Development Facility
Mr.Tran Du Lich National Assembly Member and Director of Ho Chi Minh City Institute ofEconomics.
Mr.Vu Xuan Tien Director, VFAM Consulting
Mr.Vu Quang Thinh General Director, MCG Consulting
PCI SUMMARY REPORT
9THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
At its most basic level, the 2008 ProvincialCompetitiveness Index (PCI) is the collective voiceof 7,820 domestic private firms. Privateentrepreneurs' opinions regarding economicgovernance in their provinces are collected in alarge-scale survey.Their responses are adjustedwith published data to address perception biases,and these answers are aggregated into provincial-level scores.The final outcome is a compositeindex ranking Vietnam's 64 provinces according totheir performance on 10 dimensions ofgovernance that are critical for private sectordevelopment 1. As a result, the PCI provides themost objective metric available for gauging theimpact of economic and administrative reforms atprovincial and national levels.
Four features of the PCI approach have enhancedits reception among Vietnamese policy makers andbusinesspersons since its initiation in 2005. First, bynormalizing the scores around best economicgovernance practices already found in Vietnam andnot against ideal and possibly unattainable standardsof good governance, the PCI encouragessubnational governments to improve theirperformance. For each indicator, a "star" or top-performing locality can be identified and any otherprovince can conceivably attain a perfect score of100 in future PCIs by emulating these Vietnamesebest practices.
Second, by separating out the economic growthgenerated by initial conditions (that is, thefundamental underlying factors that contribute toeconomic growth in a province but that are virtuallyimpossible to address in the short term, such aslocation, infrastructure, size of the domestic market,
and human resources), the PCI identifies goodeconomic governance practices achieved at theprovincial level.
Third, by comparing economic governance practicesagainst actual economic performance, the PCIestimates how important governance practices arein attracting investment and generating growth.Theresearch shows a strong association among: 1)business-friendly economic governance practices; 2)business operations in response to those practices;and 3) importantly, improvements in economicactivity such as output, investment, profits, andincome.This last connection is critical because itmakes clear that business-friendly policiesencourage firms to operate in ways that benefit notonly the executives and workers in each firm butalso society more broadly by creating jobs andraising incomes throughout the economy.
Fourth, the indicators that comprise the PCI areactionable in the sense that they are specific itemsthat provincial officials can target and monitorimprovement upon, and they are action-worthybecause they represent policies that private firmshave identified as critical to their business successand that previous research has shown to beinfluential for firm performance.
Much more detail is provided on specific indicatorsin Box 1 below and the Full Report, but a provincethat performs well on all 10 PCI sub-indices is onethat has: 1) low entry costs for business start-up; 2)uncomplicated access to land and security ofbusiness premises; 3) transparent and equitable legaland business information; 4) minimal informalcharges; 5) limited time wasted on bureaucraticprocedures and inspections; 6) lack of bias towardparticular types of firms, especially state-ownedenterprises (SOEs); 7) a proactive and creativeleadership; 8) special private sector development(PSD) initiatives to address market failures; 9) well-trained labor; and 10) fair and effective legalprocedures for dispute resolution.
1. Ha Tay has now been merged with Ha Noi, but was a separateentity at the time of the survey.We assess it as a separate unitbecause firms would have been responding to questions with Ha Tayand not Ha Noi authorities in mind. A similar approach is used forthe districts of Vinh Phuc and Hoa Binh provinces that have nowbeen merged with Ha Noi.
INTRODUCTION TO THE PCI
10 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
1 A Picture of the PCIRespondents
The claim that the PCI represents the collectivevoice of the private sector is somewhatpresumptuous.Who are these entrepreneurswho purport to speak for the entire businesscommunity? After all, any bias in the selection ofoperations affects the value of the informationthat can be gleaned from the survey.By delineating the PCI sample according to keyfactors of interest to readers,Table 1 shows thatfirms answering the PCI survey look much likethe business community as whole, representing all
sizes and flavors of entrepreneurial activity inVietnam.This, of course, is by design. Respondentsare randomly selected from a list of registeredprivate firms that is supplied by the National TaxAuthority and precautions are put in place toensure the representativeness of the sample2.
2. Results are based on a stratified random sample and mail-out surveyin each province, yielding a national response rate of 26 percent, upfrom 21 percent in 2007. Response rates are similar throughout thecountry, so non-response bias is likely systematic across jurisdictions.This year we followed up with non-responders in our survey, findingthat 21 percent of our mail-out went to firms that were no longer inexistence or had moved their operations, or where the Tax Authorityhad incorrect contact information.Taking these into account, our trueresponse rate is 30.2 percent.
Table 1: Who Answers the PCI Survey?(Composition of the 7820 Total Respondents)
Provincial Sample National Sample
LLeeggaall FFoorrmm
Sole Proprietorship
Limited Liability
Joint Stock
Joint Stock with Share Listed on Stock Exchange
Partnership/Other
SSeeccttoorr ww//MMaajjoorriittyy OOuuttppuutt
Manufacturing/Construction
Service/Commerce
Agriculture/Aquaculture/Natural Resources
Equal Output in Two Sectors
AAggee ooff FFiirrmm
Registered before Enterprise Law
Registered After Enteprise Law
PPCCII
41.1%
42.7%
15.4%
0.3%
0.2%
PPCCII
43.9%
50.6%
1.2%
4.2%
PPCCII
12.2%
87.8%
MMeeddiiaann TTaaxx AAuutthhoorriittyy
43.8%
44.3%
10.4%
NA
1.5%
MMeeddiiaann TTaaxx AAuutthhoorriittyy
44.1%
53.3%
2.6%
NA
MMeeddiiaann TTaaxx AAuutthhoorriittyy
7.2%
92.7%
WWeeiigghhtteedd PPCCII
26.3%
50.1%
21.6%
1.8%
0.0%
WWeeiigghhtteedd PPCCII
43.6%
55.4%
0.4%
0.6%
WWeeiigghhtteedd PPCCII
15.9%
84.1%
TToottaall TTaaxx AAuutthhoorriittyy
25.9%
56.8%
17.3%
NA
NA
TToottaall TTaaxx AAuutthhoorriittyy
42.6%
52.8%
3.6%
NA
TToottaall TTaaxx AAuutthhoorriittyy
10.40%
89.60%
Provincial Sample National Sample
SSiizzee ooff OOppeerraattiioonnss ((TToottaall AAsssseettss,, BBiilllliioonn VVNNDD))
Under 0.5
From 0.5 to under 1
From 1 to under 5
From 5 to under 10
From 10 to under 50
Over 50
HHiissttoorryy ooff CCoommppaannyy
Greenfield Private Company
Began Operation as Household Enterprise
Former Local State Owned Enterprise
Former Central State Owned Enterprise
PPrriimmaarryy CCuussttoommeerrss
Vietnamese Indivduals and Companies
State Owned Companies
Export Directly or Indirectly
Foreign Individuals or Companies in Vietnam
PPCCII
14.5%
17.8%
42.7%
13.3%
9.3%
2.4%
PPCCII
36.5%
57.7%
4.8%
1.0%
PPCCII
64.7%
25.2%
5.2%
3.5%
MMeeddiiaann GGSSOO
16.7%
18.7%
44.7%
8.4%
8.4%
3.1%
WWeeiigghhtteedd PPCCII
8.6%
16.5%
44.3%
18.1%
8.2%
4.2%
WWeeiigghhtteedd PPCCII
34.8%
54.9%
6.4%
3.9%
WWeeiigghhtteedd PPCCII
58.2%
21.0%
11.4%
9.4%
GGSSOO CCeennssuuss
13.5%
18.5%
54.0%
9.9%
7.5%
2.0%
PCI is the PCI survey sample, stratified at the provincial level.Weighted PCI is the PCI survey sample, but weighted by provincial share of enterprises to create a nationally representative sample.Median Tax Authority provides the values in the median province.Total Tax Authority shows the national level aggregate scores.GSO Census is the 2007 Enterprise Census of the General Statistical Office.(http://www.gso.gov.vn/default_en.aspx?tabid=479&idmid=4&ItemID=7184)
11THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Forty-one percent of respondent firms are soleproprietorships, 43 percent are limited liabilitycompanies, and 16 percent of firms are registered asjoint-stock companies. By design, these proportionsreflect the average provincial patterns; the PCI uses astratified random sampling strategy at the provinciallevel. According to the Tax Authority (Column 2), themedian province possesses 44 percent soleproprietorships, 44 percent limited liabilitycompanies, 10 percent joint-stock companies, and 2percent other.Thus, our sample is perfectly adjustedto each province, but varies slightly from nationalscores as a whole, where limited liability companiesare better represented, because Ha Noi and Ho ChiMinh City (HCMC) account for a smaller share ofthe PCI sample than they do private sector activityin the country. Table 1 (Column 3 and 4) alsopresents a national PCI sample (re-weighted by theproportion of total firms in each province) andaggregate data from the Tax Authority to facilitatenational-level comparisons.
Eighty-eight percent of PCI respondents registeredafter the 2000 Enterprise Law; 12 percent precedethat law and, therefore, registered under older, lessefficient procedures.
Forty-three percent of firms have between VND 1billion (US$56,000) to VND 5 billion ($282,500) intotal assets.Thirty-two percent of firms have lessthan VND 1 billion in assets and 25 percent haveover VND 5 billion.Two percent of firms have overVND 50 billion ($2.8 million) in assets.This not adramatic share of large firms, but it does reflectGSO Enterprise Census data. Over 40 percent offirms have between 10 and 50 employees. Sixpercent of respondents have more than 200
employees and 49 companies have more than 1,000.
More than half of PCI respondents beganoperations as household firms before they decidedto formalize their activities by registering atprovincial Departments of Planning and Investment.This is a critical finding because it demonstrates thatVietnamese institutions are conducive toformalization3.
Finally, and quite importantly for the purposes ofthe PCI, all of Vietnam's 64 provinces are wellrepresented in the Index.The average number ofresponses per province was 122, with only oneprovince (Lai Chau) receiving fewer than 75.Nevertheless, the 52 firms that did answer in LaiChau account for about one-third of all operationsin the rural, Northwestern jurisdiction.
2 The Final 2008 ProvincialCompetitiveness Ranking
The weighted 2008 PCI ranking is shown in Figure 1.Three differences between this year and last year areimmediately apparent. First, for the first time in fouryears, we have a new top-performing province-DaNang (72.18) moved slightly past Binh Duong (71.76)province.The margin between the two top provinces,however, is so small that it is statistically negligible.Both remain within the Excellent performance tier.
12 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
3. For a more detailed discussion of the formalization in Vietnam, seeMalesky, Edmund, and Markus Taussig. 2008. "Out of the Gray:TheImpact of Institutions on Business Formalization." Presented at theAnnual Meeting of the American Political Science Association, Boston,Massachusetts, August 28.
13THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Figure 1:Weighted Provincial Competitiveness Index 2008
Da Nang Binh Duong
Vinh Phuc Vinh Long
DongThap longAn BenT", u.oQ;
An Giang IT-Hue
Binh Dinh BRvr
HCMC QuangNam
DongNai Bac Ninh
~nh Thuan Ca Mau Yen Bai
Hung Yen Tien Giang
Can Tho Ninh Binh Hau Giang
Tra Vinh HaNam
QuangNinh Thai Binh
Soc Trang Hai Duong
Ha Noi Binh Phucx:
DakLak PhuTho
Kien Giang Khanh Hoa
Tuyen Quang Gia Lai
PhuYen QuangTri
QuangNgai Nam Dinh NgheAn Hoa Binh Ha Giang
Lam Dong Ninh Thuan
Hai Phong Ha Tinh
Bac Giang Son La
Thanh Hoa Thai Nguyen
Lang Son HaTay
Tay Ninh Quang Binh
Lai Chau KonTum Cae Bang
Dak Nong Bac Lieu Bac Kan
Dien Bien
72.18 } 71.76 Excellent
69.37 66.97 66.6-4
63.99 62.42
61.22 61.12
60.71 60.67 60.51 60.15 59.97 59.62 59.57 58.75 58.6-4
57.79 57.53 57.27
56.32 56.14
55.36 55.17 55.13 54.70 54.27 54.24 54.07 53.74 53.71 53.33
52.49 52.25 52.12 52.00 51.82 51.24 50.72
SO.05 49.52
48.46 48.35 48.18 48.10 47.82 47.68 47.48 47.44
46.60 46.22 46.03
45.63 45.09 45.09
44.17 43.95
41.94 41.02 41.01 40.92
39.78 36.39
High
Mid-High
Average
Mid-Low
o 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
14 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Figure 2: PCI 2008 Map of Vietnam
The final 2008 PCI represents the weighted sum ofthe scores of the 10 sub-indices, based on theweights shown in Table 2. In 2006, weights werecalculated using a three-step statistical procedure4.The ultimate goal of weighting is to ensure that PCIscores are calibrated to private sector performanceand, therefore, that the PCI relates the mostrelevant information to provincial officials regardingthe impact of their policies on private sector activity.Sub-indices that were shown to have the largestassociation with private sector growth, investment,and profitability received the highest weight class of15 percent. Correspondingly, those that are notstrongly correlated with private sector developmentoutcomes received the lowest weight class of 5percent. Medium weights of 10 percent werereserved for average correlations across the threeoutcome variables or a large substantive effect onone outcome (e.g., profitability), but a minimalrelationship with the other two.The 2008 PCIemploys the 2006 weights to allow for longitudinalcomparison. In future versions of the PCI, however,weights will be re-calibrated to capture the dynamicnature of the Vietnamese economic reform agenda.
The second difference between this year's PCI andlast year's is that the median weighted PCI score(53.2) is lower than the 2007 median (55.6), yet itremains above the 52.4 median recorded in 2006.Significant drops in scores were limited to twospecific areas: Private Sector Development Services
(PSD) and Labor Policy. Because these are two ofthe four most heavily weighted sub-indices, theirimpact on the overall outcomes was quitesubstantial. Low scores on PSD and especially LaborPolicy are not anomalies; they are recorded amongmost provinces and represent what appears to be agrowing disappointment among the private sectorregarding the effectiveness of the contribution byboth local and national officials to economicdevelopment. In some cases, the disappointmentemanates from tangible declines in public servicedelivery. In other cases, negative firm perceptionsare the result of increasing expectations broughtabout by a strong history of improvement in legaland regulatory reform in Vietnam. Constantimprovement in government performance over thepast decade may have raised firm expectations tothe point where no improvement or marginaldeclines may generate negative perceptions fromrespondents.We explore both of these hypothesesdirectly in detail in the Full Report.
As a result of declines in scoring, another overalldifference can be seen between the 2007 and 2008ratings-shifts in the tiers of provincial performance. Asmaller number of provinces are now ranked in theExcellent and High tiers in Figure 1. Once again, tofacilitate comparisons with previous years, we peggedthe six performance tiers (Excellent, High, Mid-High,Average, Mid-Low, and Low) to the break-points setin the 2006 analysis. For instance, this year both BinhDinh and Vinh Long dropped below the break-pointat 69, which differentiates Excellent (shaded inpurple) and High performers (shaded in dark blue),while Vinh Phuc rose above the threshold. At thebottom of the rankings, two new provinces slippedbelow 42 and into the realm of low-performers.
15THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
4. See Malesky, Edmund. 2008. A Peek under the Engine Hood:TheMethodology of The Asia Foundation's Subnational EconomicGovernance Indices. San Francisco:The Asia Foundation , p. 16.http://asiafoundation.org/publications/index.php?q=&searchType=country&country=3.
Sub-Index
PSD services
Transparency
Labor training
Proactivity
Time costs of regulatory compliance
Legal institutions
SOE bias (competition environment)
Informal charges
Land access and security
Entry costs
Table 2: Sub-Index Weightings
Rounded Weights
15%
15%
15%
15%
10%
10%
5%
5%
5%
5%
Weight Class
High
High
High
High
Medium
Medium
Low
Low
Low
Low
Weights are derived from regression analysis using three dependent variables (number of private firms, investment per capita, and profitper firm). See Appendix 2 for full regression results.
16 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
As in early reports, the PCI 2008 uses a range of indicators that are grouped together into 10composite sub-indices.These 10 sub-indices, illustrated in Figure 3, are:
1. Entry Costs: A measure of: i) the time it takes a firm to register and acquire land; ii) the timeto receive all the necessary licenses needed to start a business; iii) the number of licensesrequired to operate a business; and iv) the perceived degree of difficulty to obtain alllicenses/permits.
2. Land Access and Security of Tenure: A measure combining two dimensions of the landproblems confronting entrepreneurs: how easy it is to access land and the security of tenureonce land is acquired.
3. Transparency and Access to Information: A measure of whether firms have access to theproper planning and legal documents necessary to run their businesses, whether thosedocuments are equitably available, whether new policies and laws are communicated to firmsand predictably implemented, and the business utility of the provincial webpage.
4. Time Costs and Regulatory Compliance: A measure of how much time firms waste onbureaucratic compliance, as well as how often and for how long firms must shut theiroperations down for inspections by local regulatory agencies.
5. Informal Charges: A measure of how much firms pay in informal charges, how much of anobstacle those extra fees pose for their business operations, whether payment of thoseextra fees results in expected results or "services," and whether provincial officials usecompliance with local regulations to extract rents.
6. SOE Bias and Competition Environment: A measure focusing on the perceived bias ofprovincial governments toward state-owned enterprises, equitized firms, and other provincialchampions in terms of incentives, policy, and access to capital.
7. Proactivity of Provincial Leadership: A measure of the creativity and cleverness of provinces inimplementing central policy, designing their own initiatives for private sector development,and working within sometimes unclear national regulatory frameworks to assist and interpretin favor of local private firms.
8. Private Sector Development Services: A measure of provincial services for private sector tradepromotion, provision of regulatory information to firms, business partner matchmaking,provision of industrial zones or industrial clusters, and technological services for firms.
9. Labor and Training: A measure of the efforts by provincial authorities to promotevocational training and skills development for local industries and to assist in theplacement of local labor.
10. Legal Institutions: A measure of the private sector's confidence in provincial legal institutions;whether firms regard provincial legal institutions as an effective vehicle for dispute resolution,or as an avenue for lodging appeals against corrupt official behavior.
Box 1: The 10 Sub-Indices of the PCI
17THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Figure 3: Province Performance by Sub-index
Dien Bien Bac Kan Bac Ueu DakNong Cao Bang Kon Tum Lai Chau Quang Binh
<J> ~ ~ ~ ~ ~ 2P ~
TayNinh HaTay Lang Son Thai Nguyen Thanh Hoa Son La Bac Giang Ha Tinh
~ * ~ ~ ~ W ~ ~ Hai Phong Ninh Thuan Lam Dong Ha Giang Hoa ~nh NgheAn Nam Dinh Quang Ngai
~ ~ ~ ~ ~ ~ ~ ~ QuangTri Phu Yen Gia Lai TU)en Quang Khanh Hoa Kien Giang Phu Tho DakLak
~ ~ ~ ~ ~ ~ 1F @7
Binh Phuoc HaNoi Hai Duong Soc Trang Thai Binh Quang Ninh HaNam Tra Vinh
~ ~ ~ ~ ~ ~ ~ ~ Hau Giang Ninh Binh Can Tho Tien Giang Hung Yen Yen Bai CaMau Binh Thuan
~ @ ~ ~ ~ ~ W ~ Bac Ninh Dong Nai Quang Nam HCMC BRVT Binh Dinh TT-Hue An Giang
~ ~ ~ ~ 00 ~ ~ W LaoCa Ben Tre longAn DongThap Vinh Long Vinh Phuc Binh Duong Da Nang
~ 00 ~ W ® W @~
C) Entry Costs G Time Costs of Reg. Compliance o Proactivity
o PSD Services
o Labor Policy o Land Access & Tenure 0 Informal Charges
G Transparency G) SOE Bias o Legal Institutions
Robustness of the Rankings
The decline in the rankings cited above is systematicacross the country. No region or particular group ofprovinces was impacted disproportionately. As aresult, the 2008 rankings look remarkably similar tothose from previous years. Da Nang, Binh Duong,Vinh Phuc, Lao Cai, Dong Thap, and An Giangremain among the very best performers in thecountry. Furthermore, the bivariate correlation
between 2008 and 2007 final scores is 0.9 (seeFigure 4). In Panel B, we see that 2006 PCI scoresare also strongly correlated with 2007 scores.Together, the plots show convincingly that historicalgovernance is an excellent predictor of futuregovernance.This makes sense; governance practicescannot change overnight. It takes time to plan andimplement new initiatives, and there is even alonger lag between implementation and firmsexperiencing their effects.
18 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Figure 4: Stability of PCI ranking over time
This consistency in the provincial rankings hasimportant methodological and policy implications.Policy-wise, the stability of the rankings, despite thedecline in scores, indicates that the negativity that thePCI is picking up this year results from national-levelfactors that are being experienced across the country.
Methodologically, the strong correlation over timeindicates that the indexing approach works quitewell.The index can consistently identify topperformers, while allowing room for other provincesto improve and receive higher scores in subsequentyears. Such stability is confirmation that the PCIapproach offers a consistent and accurate measureof provincial economic governance over time.
"Stability" is not synonymous with "fixed." Over the
past two years, a number of provinces have graduallyclimbed up the PCI ladder. Figure 5 shows thecumulative changes experienced by all provinces overthe past two-years, while Table 3 highlights theprovinces that have recorded the greatest two-yearand single-year improvements.There are severalinteresting things to note in Table 3. First, 4 of the top10 improvements were achieved by provinces in theMekong Delta, including the 2 provinces with thegreatest improvements-Ca Mau and Long An. LongAn now ranks among the top-performing provincesin the country. Second, whereas last year the keydrivers of improvement were the Transparency andTransactions Costs sub-indices, this year,improvements have been led by less Bias towardSOEs and greater Proactivity of Provincial Leadership.
19THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Figure 5: Improvement in PCI Ranking Between 2006 and 2008
CaMau longAn TT-I-Iue HaNam
Binh Phucx: Be1 Tre
Quang Ngai Binh TtlJan lien Giang
Halinh Tuyen Quang
Thai Binh HaTcrt BRvr
HaNoi lai Chou
DongThap VInh Phuc
Ninh Thuan DakLak
HauGiClrl: Thanh Hoa
Son La Kon Tum
DakNo'li Nam D...,h
QuangNam Da Nang
Hung Yen Hai Duong
Quang Ninh Vinh LCI'Ig An Giang
Binh Duong Ha Giang Sac Ninh
lmCai Bat Lieu
Sac Giang Hoa Binh
Soc Trang Dietl Bien Ninh Bi1h Kien Giang QuangTri
HCMC Yen Bai
H. Phong TayNinh BiM Dilh
QuangBnh Lang Son Cae Bang DongNai ",",Do'li
GiaLai TraVnh Can Tho
Khanh Hoa Phu Tho Phu Yen
NiIleAn Th. Ngu)"ll
Bac Kan
-40 -20
--------------• • • --------------
o 20
20 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Tabl
e 3:
Prov
ince
s w
ith
Gre
ates
t Im
prov
emen
t in
Wei
ghte
d PC
I Ran
king
s
Ca
Mau
Long
An
TT-H
ue
Ha
Nam
Binh
Phu
oc
Ben
Tre
Qua
ng N
gai
Binh
Thu
an
Tien
Gia
ng
Ha
Tinh
Med
ian
Prov
ince
Ca
Mau
Long
An
TT-H
ue
Ha
Nam
Binh
Phu
oc
Ben
Tre
Qua
ng N
gai
Binh
Thu
an
Tien
Gia
ng
Ha
Tinh
Med
ian
Prov
ince
Proa
ctiv
ity/L
and
Labo
r/SO
E
Lega
l
Proa
ctiv
ity
SOE
Bias
Proa
ctiv
ity/S
OE
Entr
y/In
form
al
SOE
Bias
Tran
spar
ency
SOE/
Entr
y
38 36 30 24 22 18 16 14 12 11 0
18 6 10 26 32 7 41 17 21 49 32
58.6
4
63.9
9
60.7
1
55.1
3
53.7
1
62.4
2
50.0
5
58.7
5
57.2
7
47.4
8
53.5
1
20 17 15 15 11 10 8 8 8 7 1
Ca
Mau
TT-H
ue
Tien
Gia
ng
Ha
Tay
Long
An
Than
h H
oa
Bac
Gia
ng
Soc
Tran
g
Tay
Nin
h
Qua
ng N
gai
Med
ian
Prov
ince
27 25 21 21 21 17 13 13 13 12 0
Two-
Year
Impr
ovem
ent
2006
-200
8O
ne-Y
ear
Impr
ovem
ent
2007
-200
8O
ne-Y
ear
Impr
ovem
ent
2006
-200
7
Prov
ince
Prov
ince
Prov
ince
2008
PC
IR
ank
2008
PC
ISc
ore
Sub-
Indi
ces
Mos
tIm
port
ant
for
Impr
ovem
ent
Impr
ovem
ent
inR
anki
ngIm
prov
emen
tin
Ran
king
Impr
ovem
ent
inR
anki
ng
21THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Finally, and most important, more than half of thegreatest leaps were experienced in provinces thatmade legal commitments to improve their PCIscores through official resolutions of the PartySecretary and People's Committee or throughaction plans sanctioned by the top leadership (TT-Hue,Tien Giang, Ca Mau, Long An, Quang Ngai).These documents go beyond noncommittalstatements that call for general improvements tospecifically identify key provincial weaknesses ineconomic governance, assign responsibility toindividual actors, provide clear targets for measuringsuccess, and identify local initiatives to help achievethose results.
In essence, the provinces that have shownimprovement are the ones where local leadersopenly committed themselves to the task, formallyannouncing commitments to their subordinates and,in many cases, to the public at large.While the PCIresearch team has collected and assembled a libraryof such documents, these reports do not have adirect impact on scoring. Our scoring is based onlyon the opinions of independent firms.Thus, the risein scores in the provinces that committed overtly tochange is the result of entrepreneurs in those areashaving experienced the new environment first-handand having recorded their improved perceptions intheir survey responses. Rises in scores are a creditto the work and openness of local officials in theselocations.
3 Changes over TimeAs discussed above, there is little evidence ofgeneral improvement in economic governance thisyear. Most of the sub-indices show smallimprovements, but none that are as dramatic as theleaps taken between 2006 and 2007. Nevertheless,
trends on a few critical indicators are worthy ofnote. Detailed chronological tables and descriptionsof indicators are available in Chapter Six of the FullReport.This section provides only a few highlights.
Positive Signs
As a result of one-stop shop (OSS) implementation,which we discuss in more in the Full Report, waitingperiods for business registration and procedures forstart-up have declined significantly this year. Securityof property rights also continues to improve.Thisyear, 81 percent of PCI respondents have formalLand Use Rights Certificates, up from 75 percent in2007 and 55 percent in 2006.This solid increase issupported by official data from the Ministry ofNatural Resources and Environment.
Importantly, as a result of a proliferation ofProvincial Legal Gazettes (also analyzed in the FullReport), access to legal documents also continuesto improve dramatically (See Table 4 below).Thepercentage of firms negotiating their tax paymentswith local officials-another important indicator oftransparency-improved in 2008 as it has in previousyears. Only 36 percent of firms admit to this activityin 2008, down from 41 percent last year and 61percent in 2006.
Finally, SOE bias is at a historical low: only 39 percentreport explicit bias on behalf of SOEs. More than 50percent of firms believe that their province has apositive attitude toward private entrepreneurs, andthe number of SOEs operating in provinces hasdeclined by 60 percent since 2000. In fact, SOE Biasis now so low that we will likely drop it in futureiterations of the PCI. Although firms still worry aboutcentral conglomerates, they are much less concernedabout favoritism toward local SOEs.
Another important development in this year's PCIis the large increase in the usage of provincialeconomic courts this year, as reported by thePeople's Supreme Court of Vietnam.The number oftotal cases filed more than doubled between 2006and 2007, from 2,445 to 5,198.The number ofcases filed by private entrepreneurs grew by 130percent in 2007 compared with 2006 (see Figure6). Higher usage of courts by private actors isgenerally considered to be a positive development
because it indicates that entrepreneurs have greaterfaith in legal institutions and are more willing tomove beyond social relations as a mechanism forenforcing contracts. It also may reflect theconsiderable improvement in contract and othercommercial laws in Vietnam over the past six yearssince the Bilateral Trade Agreement with the US,which has made the law clearer in many regardsand, thus, provides firms with a greater confidencein their business rights and responsibilities.
22 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Table 4: Access to Business Documentation(Percentage of the 2,500 PCI Panel Respondents who believe access to documentation is possible)
Document
Legal Normative Document
Central Laws and Decrees
Implementing Documents of Ministries
People's Committee Decisions
Incentive Policies
Changes in Tax Law
Official Legal Gazette
Planning Document
Provincial Budget
10-Year Master Plan
Annual Plan
Private Sector Development Plan
New Infrastructure Plans
Central Investment Plan
Access to Land Use Plan and Maps
Business Registration and Land Use Applications
Address and Phone of Local Agencies
Data on Registered Enterprises
Relationship Necessary to Get Documents (% Agree)
Central Changes in Laws are Predictable (% Usually)
Provicial Implementation is Predictable (% Usually)
2008
65.46
65.19
65.19
67.49
48.34
81.11
63.15
47.59
35.15
54.47
57.79
53.11
42.81
30.30
38.64
62.47
52.60
48.60
49.28
13.12
6.46
2007
61.19
60.31
58.26
62.61
47.70
77.09
43.85
31.09
50.77
53.07
49.74
40.54
27.68
36.12
61.75
56.3
13.99
8.42
2006
62.86
60.56
60.90
67.38
49.74
75.72
48.66
35.09
57.84
59.97
54.68
46.93
31.18
41.82
61.75
61.88
16.62
11.38
23THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Figure 6: Changes in Usage of Court System Over Time
As Vietnam's private firms expand and start to dobusiness with actors in other provinces andcountries-outside of their immediate social circle-theymust rely more on formal, arms-length legalprocesses, which must be perceived to be fair andindependent. Further analysis of the disaggregatedPeople's Supreme Court data by case type revealsthat the vast majority of legal cases filed (roughly 70percent) involve some form of contract enforcementon the purchase or sale of goods. Much smallerpercentages have to do with finance and banking (8percent) and problems related to construction (6percent).Thus, on its face, the greater usage of courtsin Vietnam by private firms appears to be anexcellent indicator of successful legal reform.
Worries
A disconcerting deterioration in performance isobservable in the Time Costs of RegulatoryCompliance sub-index.The decline in the medianscore from 6.2 to 5.8 is not nearly as dramatic as the
precipitous falls in PSD and Labor, nor is it astatistically significant change. Nevertheless, individualindicators within the sub-index demonstrate cleardeclines.The percentage of time spent onbureaucratic procedures continues to increaseannually. Currently, 23 percent of firms spend morethan 10 percent of their time on bureaucraticprocedures, with few firms detecting anyimprovements in the burden caused by administrativebarriers.While entry costs have improveddramatically, it appears there is still much work to doon addressing the cumbersome post-registrationcosts of regulatory compliance. Most policy efforts onpost-registration regulation have focused oninspections. Consequently, these have now beenreduced to minimal levels and do not appear to bean important obstacle faced by entrepreneurs. Onthe other hand, firms still complain of cumbersomepaperwork and other procedures in day-to-dayinteractions with provincial bureaucrats. Clearguidelines involving the distribution of value-addedtax (red) receipt books and renewals of
environment, health, and safety certificates top thelists of firms' priorities for policy makers. As alwaysin Vietnam, interpretation and implementation ofadministrative procedures varies heavily by province.
The Prime Minister's Master Plan on AdministrativeProcedures Simplification (Project 30) implementedby the Office of the Government and supported byVNCI goes a long way toward resolving these issuesby inventorying and reviewing all of theadministrative procedures affecting firms at both thenational and provincial levels in a transparent,accessible, and comprehensive database. First theinventory phase will allow for a quick and thoroughassessment of the current post-registrationregulatory burden faced by firms in each economicsector and province. Firms will clearly know theirrights and obligations.The inventory will allow forstandardization of all nationally issued administrativeprocedures and ready comparison of provincialregulatory initiatives, so local leaders can follownational initiatives and identify the standards thatbest suit their needs. The second phase of Project30 to review, simplify, or abolish unnecessary, illegal,and cumbersome procedures will reduce the hugeburden of paperwork and compliance costsaffecting firms in their daily operations, easing theinterpretation and implementation of administrativeprocedures nationwide.
Other indicators do not demonstrate significantyear-on-year changes.Though not declines, thesetrends are worrying because they have beenidentified as key policy initiatives by the leadershipand, therefore, stagnation is disquieting. Indicators ofInformal Charges, for instance, have shown nodiscernable improvements. Frequency of, size of, andobstacles posed by bribery have remained the samefor the past three years, despite the government'shighly public efforts to reign in such activity 5. Oneof the cornerstones of public administration reformwas to increase the salaries and improve the qualityof civil servants so that bribes would become a lessimportant part of public service delivery.Theseambitious goals do not appear to have beenachieved at the local level.
Currently, two new initiatives are underway that areplanned to help address the deficiencies of previouscorruption efforts.The National Strategy onCombating and Preventing Corruption by 2020,currently being drafted, is planning to integrate effortsacross a number of line ministries and local agencies.
In addition, the newly passed Law on Public Officialsand Civil Servants is expected to upgrade and createa clean, motivated, and effective civil service throughmerit-based performance incentives, includingperformance evaluations, competitive recruitment forcontract positions, and clearly defined jobdescriptions. PCI data will certainly help gauge theeffectiveness of these efforts and theirimplementation at the provincial level.
In sum, tremendous improvements have beenrecorded, but more work remains.The continuingburden of cumbersome regulatory proceduresunnecessarily raises firms' costs and cuts into theirbottom lines, while the lack of real progress oninformal charges substantially raises the risks ofentrepreneurial activity.
4 Impact of GovernanceImprovements on PrivateSector Growth and Welfare
Each year, the PCI research team providesregression results that establish a strong associationbetween the unweighted PCI results and keyprivate sector performance outcomes.
We consistently show that provinces with bettergovernance make more productive use of initialendowments. Initial conditions certainly matter;more well-endowed provinces have much higherincomes (measured by gross domestic product(GDP) per capita) than their less well-endowedpeers. However, at every level of initialendowments, better-governed provinces (i.e., thosewith PCI scores above the 2006 median) out-perform less well-governed localities.This is truewhether we use overall level of GDP per capita (seeFigure 7, Panel A) or focus on the average change inGDP per capita over the past two years (see PanelB).The gap between the solid blue line (thepredicted values for high PCI provinces) and thedashed red line (predictions for low PCI provinces)is what we term the "economic governancepremium." It indicates that at each level of initialconditions, better-governed provinces are able touse their endowments more efficiently and achievehigher levels of economic welfare. (See Appendicesof Full Report for detailed regression results.)
24 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
5. Vasavakul,Thaveeporn. 2008. "Recrafting State Identity: Corruptionand Anti-Corruption in Doi Moi Vietnam from a ComparativePerspective." Presented at the Conference on Re-Making theVietnamese State, Hong Kong, August 21
25THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Figure 7: Governance Premium(The Impact of Good Governance on Provincial Wealth and GDP Growth)
Note for display purpose, this graph drops national-level cities and Ba Ria - Vung Tau, because they are outliers that are difficult to display in asingle figure.
While these regressions control for a range offactors-notably infrastructure, human capital, andproximity to major markets-we were never whollysatisfied with them. Because we did not havesufficient data on economic governance over time,we were only able to establish that there was anassociation between good governance andoutcomes among provinces within a given year.Thisis the relationship demonstrated in Panel A.That is,we could show that private sector performance inwell-governed provinces was better than that inpoorer provinces. In this case, the governancepremium in the figure is the relative difference inGDP per capita, within a single year, between well-and poorly governed provinces. Although this cross-sectional (across geographic space) correlation is
important, it is static and limited because it cannoteffectively track the influence of changes over time.
From a policy perspective, it is more useful to allowfor more dynamic analysis of whether governanceimprovements within a single province influencethat specific province's business performance andincome in future years. In other words, it would behelpful to show that over-time improvements onPCI indicators lead to improvements in economicoutcomes. After all, this is the calculation that aprovincial leader must make, asking: "Will thisinitiative that I am considering today improve theeconomy in my province tomorrow?"
Now that comparable data on both the PCI scoresand economic outcomes going back three years are
available, time-series analysis can be performedwithin each province (sometimes referred to aslongitudinal or panel analysis). Here is what welearned. All else being equal, a one-pointimprovement in the 100-point PCI score in a givenyear within a particular province is associated with a6.9 percent increase in active private companies, a2.6 percent increase in average investment percapita, and a 1.6 percent increase in GDP per capitain the subsequent year.This is this relationshipillustrated in Figure 7, Panel B.These effects arestrongly statistically significant and the findings arerobust relative to changes in control variables anddifferent regression specifications. These resultsshow that while governance is not the only driverof improvements in economic conditions in aprovince, it does matter a great deal.
There is one important qualification for this finding.There is no statistically significant relationshipbetween improvements in governance and changesin profitability. Although there is a strong cross-sectional association (well-governed provinces havehigher profits), there is no clear evidence that asingle-year improvement in PCI scores influencesfirms' bottom lines in subsequent years.Improvements in governance seem to be moreclearly associated with the willingness of firms totake risks through entry or expanded investments.The bottom line is that firms in better governedprovinces have higher profitability, but profit marginshave not expanded along with governanceimprovements. Other factors are more influential inexplaining changes in profitability over time.
As in previous reports, we studied the differentialassociation of individual sub-index scores with keyoutcome variables. Once again, transparency ofbusiness information, proactivity of the leadership,and labor policies have the most consistent androbust impact on private sector development.Simply enhancing access to legal and planningdocuments through a one-point improvement intransparency is associated with a 3.7 percent rise inthe number of firms per 10,000 citizens in theprovince. Some sub-indices that have been onlymarginally important in past years proved to havesignificant effects on individual-outcome variablesthis year. Key among these was the Entry Costs sub-
index, which, because of the differential impact inOSS implementation across the country, wassignificantly related to new enterprises established ina province. Interestingly, lowering entry costs wasalso negatively associated with profits per firms.Thiscan be explained because lower barriers to entryincrease competition for existing entrepreneurs,cutting into their profit margins. On the other hand,Land Access and Security of Tenure had a largeimpact on firm profitability. A single-pointimprovement on this proxy for property rights iscorrelated with almost VND 9 million per firm inannual profits.
The formal details of the regression specificationsare in the Appendices of the Full Report, but thereare three technical details that general readersshould understand.
First, we use the unweighted PCI score because theweighted PCI is calibrated to private sector outcomes.
Second, the panel analysis includes provincial-levelfixed effects; that is, we only compare each provinceto itself over time and not to other provinces in thecountry. As a result, we do not need to worryabout historical or cultural factors that are specificto a locality.The fixed effects absorb this variation,allowing us to isolate the impact ofpolicy/institutional change independent of aprovince's initial conditions.
Third, there are a number of factors that affectprovincial economies but are out of control of theprovincial authorities in the short run, includinginfrastructure, human capital, population growth, andnational economic trends such as macroeconomicconditions, foreign investment, and commodity priceincreases. Our model controls for these factors sothat we can calculate the marginal improvement ofchanges in governance. Clearly these factors areimportant, but the purpose of our analysis is toassess the singular impact of governance on privatebusiness activity, holding constant the other driversof economic performance.
5 Infrastructure IndexThis year's report adds a new feature to theanalysis of competitiveness-the Infrastructure Index.
26 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
A series of recent, high-profile reports havedemonstrated that Vietnam's infrastructure isharming its competitive advantage internationally. Atthe same time, increased fiscal decentralization has,in theory, increased the opportunities for provincesto raise their own resources for infrastructureimprovements. Consequently, a number of our keystakeholders requested that we bring PCI data tobear on the subject.
In providing this analysis, we are conscious thatprovincial authorities do not have complete controlover infrastructure within their provinces, and thatthey have even less control over the perceptions ofentrepreneurs regarding local infrastructure. Manyof the indicators measured are out of the directcontrol of provincial authorities. First, much of thecurrent infrastructure was completed long beforethe tenure of today's current provincial leaders.Second, firms in distant and rural areas have highertransport costs that are inherently more difficult toovercome. Third, many infrastructure decisions aremade by central government planners. Provincescan supplement infrastructure spending out of theirown budgets to some extent, but poorer provincesdo not have this option and must depend oncentral transfers. Fourth linkages of infrastructureacross provincial borders affect firm perceptions inways that are difficult to disentangle using provincial-level survey data. It would be unfair to rankprovince A below its neighbor, province B, simplybecause central authorities selected B as the sightof the national highway. Alternatively, a province thathas done a good job of marshalling local resourcesfor new roads and maintenance may be
downgraded by firms that are forced to shipproducts outside those provincial borders over theroads of neighbors that may not have been sodiligent about infrastructure development andupkeep. It is not at all clear that entrepreneurs havea perfect understanding of where provincial bordersare situated, and which authorities deserve praise orcomplaint for poor infrastructure.
Consequently, the Infrastructure Index is simply anassessment of total infrastructure quality; it is not adefinitive evaluation of the quality of local leadershiplike the PCI. We make no assumptions about creditor culpability, and present it simply as a tool toinform the investment decisions of localentrepreneurs and the policy priorities of centraland local officials. We present these results as abaseline measure, which will facilitate tracking futuredevelopments. Longer time series of annual datawill be necessary for more rigorous analysis of theinfluence of changes in infrastructure. Nevertheless,the PCI Infrastructure Index represents a baselinethat can be used to track and analyze futuredevelopments.
The Infrastructure Index ranks the relative levels ofinfrastructure across the country along fourdimensions: 1) industrial zone quality and capacity;2) transportation costs; 3) telecommunications andenergy costs and stability; and 4) majorinfrastructure (ports/airports).We find that DaNang, Binh Dinh, Ho Chi Minh City (HCMC), HaiPhong, Binh Duong, and Dong Nai have the bestinfrastructure in the country, while the ruralNorthwestern Uplands have the worst.
27THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
28 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Table 5: Indicators Used In Infrastructure Index
1) Industrial ZoneQuality andCoverage
2) Road Quality andTransport Costs
3) Utilities (EnergyandTelecommunications)
Number of Industrial Zonesand Concentrations inProvince
Percentage of total IZ surfacearea that currently has occupants.
Firm Rating of ProvinicalIndustrial Zone Quality(% Very Good or Good).
Number of days annually thatroads are impassable due torainfall.*
Transport costs of a 40-footcontainer from provincial capitalto nearest major ports (HP,HCMC, DN) in Millions of VND*
Monetary loss annually fromspoiled and damaged products inthe past year (Millions of VND)*
Percentage of roads in province(national, provincial, or district)that are paved with asphalt
Hours of Telecommunicationsoutages in province permonth*
Ministry of Planning andInvestment (August 2007)
Ministry of Planning andInvestment (August 2007)
PCI Survey Question E2
PCI Survey Question: E3
General Statistics Office
PCI Survey Question E5
Average estimates bythree local transport
companies
PCI Survey Question: E1.14
Min
Median
Max
Min
Median
Max
Min
Median
Max
Min
Median
Max
Min
Median
Max
Min
Median
Max
Min
Median
Max
Min
Median
Max
Min
Median
Max
Min
Median
Max
0
1
23
0.00
30.13
93.55
3.07
23.87
72.89
3
7
19
14.6
31.9
83.1
2.1
6.5
16.0
1.98
51.28
100
7
13
50
75.00
94.18
100
1.2
11.7
113.1
Sub-Index Indicator Source 2008 Measures
Assessment oftelecommunications quality (%Good or Very Good)
Telephones (Land and Cellular)per 100,000 Citizens in 2007
PCI Survey Question E1.2
Ministry of Informationand Telecommunications
Looking at the ranking, it is immediately obviousthat the absolute levels of infrastructure areassociated with economic development, but it is notclear which way the causal arrow points. Many ofthese provinces inherited stocks of infrastructure
going back several generations or more. At thesame time, their ability to attract early investmenthas bolstered their revenue, allowing them to spendmore on subsequent infrastructure improvements.
29THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Electricity Vietnam (EVN)
PCI Survey Question E4
APL Logistics
APL Logistics
APL Logistics
APL Logistics
4) MajorInfrastructure(Ports/Airports)
Min
Median
Max
Min
Median
Max
Provinces with
Provinces w/o
Provinces with
Provinces w/o
Provinces with
Provinces w/o
Provinces with
Provinces w/o
595.51
776.17
27
44
101
5
59
25
39
4
60
15
49
Sub-Index Indicator Source 2008 Measures
Average cost per kilowat ofenergy in province (VND)
Hours of electricity outages inthe last month*
National Seaport (ContainerCargo > 34,000 TEU)
Local Seaport (ContainerCargo > 2,000 TEU)
International Airport
Domestic Airport
30 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Figure 8: PCI Infrastructure Index
Despite their absolute advantage, we find that theinfrastructure in the high-performing provinces isnot keeping up with demands on its usage.Table 6shows that provinces in the North Southeastindustrial hub have the fastest population growthand the largest share of private enterprises andeconomic output, yet they lag behind other regions
in the percentage of road covered with asphalt andimprovements in road quality, and they pay thehighest average energy prices in the country. Inessence, infrastructure does appear to be placingconstraints on development in high-growth regions,while policy makers have used infrastructurespending as a tool for redistribution.
31THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
It is critical that policy makers find the right balancebetween redistribution and growth-inducinginfrastructure investments. After all, slower nationalgrowth reduces the pool of monies available forredistribution. Fiscal decentralization and thecorresponding powers of finance it has brought toprovincial authorities may be a first step in allowinghigh-growth areas to raise the capital necessary tomeet their changing economic needs.The draftLaws on Debt Management and State Budget thatare under discussion in the current session of theNational Assembly should facilitate fiscaldecentralization but maintain centralized oversightto ward off irresponsible spending.
6 Information and CommunicationTechnology Index
In addition to the traditional types of infrastructurehighlighted above, more and more firms in Vietnamrecognize the utility of information technology forfacilitating interactions with business partners andacquiring market and technology information. In
fact, 27 percent of respondents recorded activeemail addresses on their PCI survey forms. In HaNoi and HCMC, over 60 percent of firms usedemail addresses for their contact information.Annual growth in information and communicationtechnology (ICT) penetration in all of Vietnam isestimated at 8 percent.
The ICT Index borrows from an excellent datasetassembled by Office of the Steering Committee forNational Information Technology Readiness of theMinistry of Information and Communications tobuild on five sub-indices: 1) hardware, or thephysical infrastructure for internet usage; 2) humanresources, including the training, skill sets, andpersonnel necessary for technology acquisition; 3)ICT applications, measuring the scope, scale, andefficiency of current use on existing ICT hardware;4) availability of private ICT providers as asubstitute for government provision; and 5) theconduciveness of the provincial regulatoryframework for ICT development, including whetherprovinces have local ICT committees anddevelopment policies.
Entire Country
Red River Delta
Northern Uplands
North Central Coast
South Central Coast
Central Higlands
North Southeast
Mekong Delta
Ba Ria - Vung Tau
Binh Duong
Dong Nai
HCMC
Long An
1.4%
1.1%
0.1%
0.8%
1.1%
1.6%
2.3%
0.2%
2.0%
6.0%
2.0%
3.0%
1.0%
100%
20.9%
8.3%
6.1%
7.0%
4.2%
36.4%
17.2%
7.7%
1.7%
4.0%
18.3%
1.5%
100%
27.5%
6.0%
5.0%
8.5%
2.9%
39.0%
11.0%
1.1%
2.3%
2.4%
29.7%
1.3%
15.2%
8.7%
17.1%
52.7%
18.7%
10.3%
9.7%
19.9%
-5.6%
10.0%
-3.0%
1.9%
18.7%
42.0%
83.5%
38.1%
55.8%
60.6%
49.4%
52.0%
40.7%
82.5%
64.5%
52.2%
55.9%
28.5%
777.0
734.0
766.3
687.6
789.9
779.8
865.8
791.7
860.7
871.9
865.1
1068.1
813.9
PopulationGrowth
(2002-2006)
Share ofGDP
(2007)
Share ofActivePrivateFirms(2007)
Growth inAsphaltedKilometers
of Road(2002-2006)
Percentage ofTotal
Kilometers ofRoad Covered
by Asphalt(2006)
AveragePrice ofEnergy
(VND/KW)
Table 6: Infrastructure Growth Versus Demand for Usage
32 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
1) ICTInfrastructure(Level ofhardware andphysicalequipment fortechnologyusage)
2) ICT HumanResources(Schooling,training, andpersonnelrequired fortechnology skillacquisition)
a. Land line telephones/100 peopleb. Mobile telephones/100 peoplec. Dial-up internet accounts/100 peopled. Broadband internet subscriptions/1000 peoplee. Domestic bandwidth (traffic on Vietnamese
websites)/per capitaf. International bandwidth (traffic on international
websites)/per capitag.g. Households with a computerh. Households with broadband interneti. Computers/per capita in state officesj. Computers with internet in state officesk. Computers with broadband internet in state officesl. Businesses with broadband internet
a. Primary schools with information technology (IT) coursesb. Middle schools with IT coursesc. High schools with IT coursesd. State workers with computer skillse. Educational institutes (higher than high school) with IT
courses/100000 peoplef. Graduates from above institutes/1000 peopleg. Official training centers with IT courses/100000 peopleh. Graduates from above centers/1000 people
Min 0.04
Min 0.14
Median 0.21
Median 0.31
Max 0.7
Max 0.65
Sub-Index Sub-Index 2008 Measures
Table 7: Indicators Used in ICT Index
a. Total time of domestic phone calls/per capitab. Total time of international and long distance calls/per
capitac. State budget for ICT/per capitad. Small administrations and districts with websitese.e. Businesses with websitesf. Provinces with websites or information portal and
basic information available (including: a generalintroduction, administration structure, news andevents, activities of the local administration,instructions for individuals and businesses to completeadministrative procedures, legal documents,development plans and policies, business information,questions and answers on ICT policies, searchfunction, visitor comments, frequently asked questions(FAQ), and discussion).
g. Public services offered on the internet (including:business registration, investment licensing, constructionpermission, payment methods for utility bills, privateregistration for pharmaceuticals, job advertisements,public transport services, queries and status ofadministration procedures).
3) ICTApplications(Scope, scale,and efficiencyof uses ofinformationtechnology onexistinginfrastructure).
Min 0
Median 0.17
Max 0.67
33THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
a. Number of ICT businesses/1000 peopleb. Total revenue of ICT businesses/per capita
a. Number of ICT steering committees and number ofmeetings of these committees
b. ICT policies for development: strategy and plans,encouragement, human resources development
c. Interest of local state leader/officals in ICTdevelopment and application: no interest, littleinterest, some interest, interested, very interested
4) Resources ofPrivate ICTProviders
5) Organizationand Regulationof ICT (Localpolicies,administrativestructure, andofficialregulationsgoverninginternet usage)
Min 0
Median 0.09
Max
Min
Median
Max
0.11
0.705
1
0.89
Sub-Index Sub-Index 2008 Measures
HCMC, Ha Noi, Binh Duong,TT-Hue, Da Nang, BacNinh, and Vinh Phuc received the top overall scoreson the ICT Index. As with infrastructure, a number
of mountainous provinces in the Northwest ranknear the bottom.
34 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Figure 9: Final ICT Readiness Index
HCMC HaNoi
Binh Duong TT-Hue
Da Nang Bac Ninh
Vinh Phuc BRVT
CanTho Khanh Haa
PhuTho Dong Nai
HaTay NgheAn
Hai Phong Thanh Haa Kien Giang Binh Dinh KonTum HaNam Lao Cai
Quang Binh Lai Chau HungYen
Quang Nam PhuYen Dak Lak longAn
QuangTri Thai Nguyen
BinhThuan NinhThuan
Sac Giang Hau Giang
TayNinh Quang Ngai Quang Ninh
Thai Binh Gia Lai
Ninh Binh Bac Ueu
Lam Dong HaTinh Bac Kan
Vinh Long BenTre
Lang Son TraVinh
Nam Dinh Hai Duong Dien Bien
DongThap Yen Bai
SocTrang An Giang
Binh PhuQC Tien Giang
Haa Binh DakNong
CaMau Son La
Cae Bang Ha Giang
Tuyen Quang
o 10 20 30 40 50
Ministry of Information and Communication's Intemet Readiness Index
7 ConclusionsThis short report is meant to simply provide a tasteof the detailed analysis that exists in the 2008 FullPCI Report. The summary report documents thePCI's philosophy of aggregating the viewpoints ofthousands of private investors, so that their voicecan be heard and included in policy discussions atboth national and provincial levels. This voice ispresented in such a way as to provide actionableand action worthy information to decision makers,allowing for precise calibration of policyinterventions for the largest impact on privatesector development. Moreover, the data from thePCI can be used to track the impact of policyinterventions over time.
The report also demonstrates that scores are slightlylower this year across the country, a decline that canbe traced to real evidence of disappointment amongentrepreneurs in the way provincial leaders haveresponded to both their rising expectations andcurrent macroeconomic instability.
In addition to these macro-findings, detailed analysisfinds statistical evidence of improvements in entrycosts, property rights, transparency of legalnormative documents, and confidence in provincialeconomic courts. Both national and local leadersshould be justifiably proud of theseaccomplishments.
On the other hand, there is still hard much work todo in lowering the post-registration transactioncosts faced by private entrepreneurs. These includeboth the de facto taxes imposed by cumbersomeregulatory procedures and informal chargesassessed by local officials during a variety of normalbusiness activities. Such de facto taxes aredetrimental, as they raise the cost of doing business,while their lack of predictability substantially raisesthe risks of entrepreneurial activity.
As indicated in last year's report, there is evidencethat increasing inequality is beginning to appearacross the country.Top performing provinces excelat all aspects of economic development, as shownin this report in terms of economic governance,infrastructure, and ICT capability.This group ispulling away from the rest of the country. At thesame time, another group that must struggle withweak initial conditions and poor infrastructure hasnot been able to develop the good governancepractices to compensate for their handicap.Theseare steadily falling behind the performance of theirpeers.The extent of this divergence can be seen inFigure 10, a total investment environment index,created by standardizing the PCI, infrastructure, andICT indices to a common 100-point scale andadding them up. More than 100-points separate theurban and industrial centers at the top of the indexfrom the rural mountainous regions at the bottom.
To some extent, this inequality is a natural result ofVietnam's rapid economic development. But forbusinesses in the laggard areas, poor governanceand infrastructure place severe constraints on thesuccess of their business, and consequently on theirability to create jobs and revenue in poor areas.Good economic governance should be the greatequalizer, allowing poor provinces to attract newinvestment and turn a vicious circle into a virtuousone by using the revenue provided by newinvestment to subsidize infrastructuralimprovements.
Transfers can only help mollify the short-termwelfare effects of structural inequality. Eventually,policy-makers must identify ways incentivize goodgovernance, so that the same provinces do not fallfarther and farther behind their high-performingpeers. It is our hope that the PCI can play a role instimulating these changes.
35THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
36 THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008
Figure 10: Total Investment Environment
Binh Duong HCMC HaNoi
DaNang Vinh Phuc
BRVT Bac Ninh TI-Hue DongN~ Binh Dinh
LongAn Canlha
Vinh Long Khanh Hoa
Quang Nann HungYen Thru Binh HaNann
DongThap Ben Tre
Binh lhuan Phu Yen
H~ Duong H~ Ph
QuangN'l LaoC~
Thanh Hoa N"h Binh Hau GOng
QUNJ~,e Nam Dinh Tay Ninh PhuTho
Soc Trang lien Giang
Dak Lak Gia Lai
Lam Dong Bac GOng
Kien Giang Th~ Ngu)len
QuangTri KonTum An GOng T ra \linn
HaTay Ninh Thuan Quang Binh
Yen Bai B"h Phuoc
Lang Son HaTinh
Hoa Binh L~ Chau Bac Ueu CaMau Bac Kan
TLI)Ien Quang DakNong Dien Bien HaGiang CaoBang
Son La
o 50 100 150 200
Weighted PCI Infrastructure Index ICf Index
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