The impacts of public investment and private investment on socio - economic issues in Nam Dinh province

189 THE IMPACTS OF PUBLIC INVESTMENT AND PRIVATE INVESTMENT ON SOCIO-ECONOMIC ISSUES IN NAM DINH PROVINCE M.A Nguyen Van Hau Email address: nvhaund@gmail.com Dr. Nguyen Thi Hao Email address: haonguyen1841976@gmail.com National Economics University, Hanoi, Vietnam Abstract The purpose of this study is to assess the impacts of public investment and private investment on some socio-economic issues in Nam Dinh province during the period 2000 - 2015. The results show that public investment impacts negatively on the economic growth of Nam Dinh province, the efficiency of the capital is still low and its contribution to the GDP of the province is not commensurate with the capital invested, while the private sector has positive impacts on economic growth, contributes much to the GDP of the province. While public investment has not yet played an important role in addressing social issues in Nam Dinh, private investment has become an important driving force in solving social problems. According to the assessment of the impacts of public investment and private investment, the article has implicitly raised issues concerning policies which can improve investment efficiency, especially public investment in Nam Dinh province in the near future. Keywords: Public investment, Nam Dinh, impact of public investment. 1. Introduction Evaluating the impact of public investment and private investment plays a significant role in identifying issues of public investment policy. It is based not only on the number of results achieved, but also on the relationship between the public investment and the current situation of economy, society and environment. The paper focuses on evaluating the impact of the public investment and private investment in terms of economy (assessing the contribution to GDP of the province, assessing the impact through the ICOR coefficient, assessing the impact on economic restructuring by the coefficient Cosφ, and the impact on economic growth), as well as society (measured to the decrease in the incidence of poverty and unemployment) at the provicial level. According to this assessment, the provincial government can adjust positively and appropriatly the public investment, which will limit a negative impact on the private investment. Moreover, the local government can develop a strategic direction for the public investment in order to carry out the public investment restructuring in line with the realities of the economy in the next period. Hence, the paper assesses the impact of public investment and private investment on the economy and society of Nam Dinh province. 190 2. Method 2.1. Literature review In the paper, the authors use the concept of public investment in terms of ownership, which is also used in the researches of Mankiw et al. (1992); Khan & Kumar (1997); Nguyen Minh Phong (2010) and Vu Tuan Anh (2010). The researchers define that the public investment is all investments derived from the government and state- owned enterprises. Many reseachers have attempted to determine the efficiency of public funds by estimating through the Cobb-Douglas production function, where public funds are considered an input variable. Aschauter (1989), who is one of the first researcheres in this major, explained the decline in productivity in the United States in 1970. The author pointed out that with every 1% increase in public sector capital, the efficiency of public funds would increase to 0.39%. Khan & Reinhart (1990) and Rui & Gallo (1991) developed growth model and concluded that private investment has a positive impact on economic growth which is greater than that of public investment. However, these studies used small samples of data from a small number of countries and short study periods; therefore, the results may not be accurate and comprehensive. Similarly, Khan & Kumar (1997) have more comprehensive researches which used data in 95 developing countries from 1970 to 1990 in order to evaluate the contribution of public and private investment to GDP per capita. Furthermore, Tatom (1991); Eastly & Rebelo (1993) and Wang & Raymond O'Brien (2003) also indicated that public and private sources have different effects on economic growth, of which public investment has less impacts on economic growth than private investment. However, according to Greene & Villanueva (1991) and Hadjimichael & Ghura (1995), public investment has created spillover effects on the private sector, and support private investment, then helps the economic growth increase. In view of this, Ghura & Goodwin (2000), and Romp & Haan (2007) also argued that public investment has a positive impact on economic growth. The research of the Central Economic Commission (2013) focused on analyzing and evaluating the reality of capital investment from state budget in Vietnam. The research team has set up a system of indicators to evaluate the efficiency of state budget investment in terms of economic and social efficiency. The research used the ICOR coefficient to evaluate the impact of capital investment from the state budget on the economic structure shift through coefficient Cosφ, to assess the impact of capital investment from the state budget on poverty reduction and unemployment reduction by the elasticity coefficient. Since then, the research confirmed that the investment from the budget plays a very important role in socio-economic development, contributing to improve the material and spiritual life of the people. To evaluate Public investment in relation to private investment in Vietnam, To Trung Thanh (2011) used the Vector Autoregressive Error Correction Model (VECM) to 191 estimate response function with three variables (in the form of logarit) is public sector investment, private sector investment and GDP, the study shows that public investment "overwhelmings" private investment clearly reflected in the period 1986-2010. 2.2. Research Methods First, to assess the impact of public investment and private investment on economic economics, the author (i) assesses the contribution to GDP of the province, (ii) evaluates through the ICOR, (iii) the impact assessment for economic transition through Cosφ coefficient, Cosφ coefficient is calculated by the formula: Where: - Si (t) is the weight of sector i at time t - φ is the angle of the two economic vector vectors S (t0) and S (t1), where: ≤0 φ 900 And (iiii) to evaluate the impact on economic growth, the authors use the Solow growth model (1956) and Barro's model expansion (1991), Mankiw et al. (1992), and especially Khan & Kumar (1997). Accordingly, the Solow model assumes savings rates, population growth rates, and technological progress being exogenous. The two main inputs are capital and labor. Khan & Kumar (1997) focused on the role of private capital and public investment; Therefore, these two forms of capital have been distinguished by the authors in their model. Accordingly, a Cobb-Douglas production function with production at time t will be: Y(t) = Kg(t) α KP(t) β (A(t)L(t)) 1-α-β α+β<1 (1) In particular, Y, L and A, respectively are quantity, labor and technology; Kg and Kp are capital flows of the public sector and the private sector. L and A assume exogenous growth with increases of n and g. In other words, the technological level increases steadily every year at the rate of g: = γ; And the labor force L grows steadily every year at the rate n: = n. Thus, N = LA is the effective labor, the rate of growth of the effective labor N is n + γ, or = n + γ. According to Khan & Kumar (1997), the effect of the investment rate on per capita income at the steady state can be estimated through the following linear regression model: (2) Yt is the per capita income (in 2010 prices). sP, t and sG, t in turn are the rates of private investment and public investment on total income. nt is the population growth rate.   tttGtpt xnssy   lnlnlnln 3,2,10 L L  A A  N N  192 However, not all provinces (or countries) can satisfy the conditions for achieving stopping status, so the author uses the estimation model with the assumption that Nam Dinh province is transition to steady state. The linear regression equation is presented as follows: (3) With gy, t is the growth rate of per capita income. The above models use ln (natural lograrith), so the coefficients are explained in terms of elasticity. Second, with the evaluation on the impact of public investment and private investment on society, the article uses: impact assessment of public investment and private investment to reduce poverty and reduce unemployment in the province by Elasticity is calculated by the following formula: In it, is the elastic coefficient. Xi = ln (xi) with xi is the investment per capita in urban i. Yi = ln (yi), where yi is the urban unemployment rate in year i. 2.3. Data and estimation methods Data used in the study include real incomes, public investment and private investment, working-age population, data compiled from the Nam Dinh Statistical Yearbook and data published from Report on provincial performance and public administration in Vietnam and provincial competitiveness survey database. The data used for estimation is Nam Dinh annual statistical data from 1999 to 2015. In addition, all variables are calculated according to the 2010 comparative price. In which, n is the increase rate the average of the labor force aged 15 and above (hereinafter referred to as the labor force); Sg and Sp are measured as the ratio of public invesment and private investment in total collected; and Y / L is the GDP at constant 2010 prices divided by the labor force in that year. The author uses the Ordinary Least Quares (OLS) method to estimate equations (2) and (3). 3. Results 3.1. Impact of public investment on Nam Dinh’s economy First, assessing the impact of investment through the contribution to GDP of Nam Dinh. In the period 2000 - 2015, the share of GDP of the public sector in GDP of the provincial economy is very low, only 16.8%. At the same time, the proportion of public investment capital in the total investment capital of the province accounts for 42.88%. The private sector has a direct contribution to GDP, which is higher than the public sector, in particular between 2000 and 2015, with a 57.12% share of private sector investment. This sector directly contributes to the GDP of the province up to 82.2%. It can be said that public funds are not used properly.   ttttGtpty yxnssg   143,2,10, lnlnlnln      1 2 1 X – X Y Y X X n i i i n i i         193 Figure 1: The contribution of the public sector and the private sector to GDP of Nam Dinh period 2000-2015 Nam Dinh Country Source: Nam Dinh Statistical Office; General Statistics Office of Vietnam 2002, 2015 and calculated by the author It is possible to consider the effect of public investment and private investment through the ICOR. From the ICOR indicator, the efficiency of using the same private sector investment is greater than that of the private sector. Specifically, in the period of 2000 – 2015, to generate 1 dong increasing in GDP, the private sector of Nam Dinh only needs to invest 2.72 dong while the public sector of Nam Dinh must invest more to VND9.2; In comparison with the public sector in the whole country, the public sector of Nam Dinh is still far less effective than the national public sector. The public sector has an ICOR of 4, 34. Table 1. The ICOR coefficient of Nam Dinh province in 2000 – 2015 Indicators Nam Dinh Vietnam Public sectors 9,20 4,34 Private sectors 2,72 3,10 The economy 3,62 3,52 Source: Nam Dinh Statistical Office; General Statistics Office of Vietnam 2002, 2015 and calculated by the author Second, evaluate the impact of public investment on Nam Dinh economic growth. The estimated result of log of income per labor is based on the log of the public investment ratio, log of the private investment ratio and the ln )(  n from 1999 to 2015. The assumption of γ + δ is 0.05 (Mankiw et al. (1992) and some other studies assume that γ + δ = 0.05 (with values of γ and δ respectively being 0.02 and 0.03.). According to Mankiw et al. (1992), the change in the assumed value (γ + δ) will have an extremely small effect on the estimation result. Indeed, some studies, such as that of Romer (1990), Mankiw et al. (1992), suggest that the value of δ is from 0.03 to 0.04, while Khan and Kumar (1997) supposed that the value of δ is between 4 and 5 percent. This paper uses different values of δ (from 2 to 5 percent) but the estimated results are almost unchanged. 42.88% 57.12% 16.80% 83.20% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% investment GDP public investment private investment 41.02% 58.98% 31.09% 68.91% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% investment GDP public investment private investment 194 Table 2: Estimated Solow model parameters expanded in stop state Dependent variable: ln (Y) per labor at constant prices 2010. Independent variables Extended Solow model Estimation Standard error Const 1.631111** 0.555090 ln(SI) 0.425709*** 0.104862 ln(SG) -0.357208** 0.150696 ln(n+0.05) 0.004724 0.090588 Dummy 1.246804*** 0.104076 R 2 0.97 Source: Author's calculations Note: *, **, *** represents the meaning level corresponding to 10%, 5% and 1%. Public invesment and private investment in this period all reach significant rate. In particular, Public invesment has a negative impact on economic growth of Nam Dinh, ie if the public investment increases by 10%, GDP per capita decreases by 3.6%. Private investment has a positive impact on economic growth. Specifically, if private investment increases by 10%, GDP per capita increases by 4.2%. The ln parameter has a negative value (as in equation 7) but does not gain a confident level of 1%. Regarding the estimation of the Solow model in the transition state, the author estimates the GY economic growth rate based on the log of average labor income of the previous year (Y-1), the log of the initial rate (SG), private investment ratio (SI) and ln in the period 1999 - 2015. Table 3: Estimated Solow model parameters expanded in transition state Dependent variable: GY at constant 2010 prices. Independent variables Extended Solow model Estimation Standard error Const 0.290954 0.426091 lnY(-1) -0.420761*** 0.118669 ln(SI) 0.122665 0.087427 ln(SG) -0.281387*** 0.089813 ln(n+0.05) -0.032224 0.053712 Dummy 0.576184*** 0.150361 R 2 0.66 Source: calculations by the authors Note: *, **, *** represent the meaning level corresponding to 10%, 5% and 1%. In the transitional model, public investment has a negative impact on the average income and growth speed of Nam Dinh province in the period 1999 - 2015. In this model, the advances in science and technology as well as the population hardly affect GDP per worker. 195 The above results show that in the period of 1999 - 2015, if GDP ratio increases by 10%, GDP/L will decrease by 2.8%; Conversely, if the rate of private investment increases by 10%, GDP/L will increase to 1.2% (no confidence at 5%). - Impact of public investment on economic restructuring of Nam Dinh province. In the period of 2000-2005, the fastest rate of change with coefficient Cos was 0.9772, the speed of economic transition of Nam Dinh is faster than that of the whole country. In the period of 2005 - 2010, and in the period of 2010 - 2015, the economic structure of the sector has slowed down compared to the previous period. The coefficient Cos of these two periods is 0.98640 and 0.98541 in turn. In the period of 2010 - 2015, the economic structure of Nam Dinh was slower than that of the whole country (coefficient of cosφ of the whole country is 0.97669). Table 4. To restructure the Nam Dinh industry by coefficient Cosφ Indicators 2000 - 2005 2005 - 2010 2010 - 2015 Cosφ Nam Dinh 0,97720 0,98640 0,98541 Cosφ Vietnam 0,98673 0,99628 0,97669 Source: Nam Dinh Statistical Office; General Statistics Office of Vietnam 2002, 2015 and calculated by the author 3.2. Impact of public investment and private investment on society Firstly, impact on the unemployment rate of Nam Dinh. The correlation between public invesment and the urban unemployment rate in Nam Dinh shows that, basically, when investment increases and jobs are created, the unemployment rate in urban areas will decrease. Specifically, in 2005, the scale of public invesment was 3812263 million, corresponding to the urban unemployment rate was 4.94%. Similarly, in 2015, the scale of public invesment was 537,997 million, corresponding to the rate of urban unemployment was only 2.97%. Of course, the rate of urban unemployment is also reduced by the private sector's job creation. Specifically, in the period 2005-2010, the coefficient of elasticity of public invesment and urban unemployment in Nam Dinh was -0.417, while the coefficient of elasticity of private invesment and urban unemployment of Nam Dinh was -0,489. That is, in Nam Dinh, when both increase up to 1% of investment, public investment helpes reduce 0.417% of urban unemployment rate while the private sector helps reduce 0.489% of urban unemployment. In addition, if compared with the impact of public investment of the country, the impact on reducing the urban unemployment rate of public investment of Nam Dinh is weaker than the public investment of the country. In addition, the rate of underemployment in Nam Dinh tends to slow down compared to that in the Red River Delta and in comparison with the whole country. As of 2010, the unemployment rate in Nam Dinh was 5.98, the Red River Delta was 3.5 and the whole country was 3.57; By 2015, this ratio of Nam Dinh was down to 4.21, while the Red River Delta and the country reduced to only 1.6 and 1.89 respectively. 196 Secondly, the impact on poverty reduction. In the period from 2000 to 2015, if the policy is to increase the scale of INFRA investment by 1%, the poverty rate of Nam Dinh only decreases by 0.001519%, while the private sector helps to reduce 0., 0107%. Compared to the whole country, the Nam Dinh‘s public investment policy is better than that of the whole country, the coefficient of elasticity between public invesment and the poverty rate of the whole country in the period of 2005 - 2015 is (- 0.000655%). Specifically, the elasticity between public invesment and the poverty rate of Nam Dinh are shown in the following table 5 Table 4: Elasticity of public investment and urban unemployment and Elasticity of public investment and poverty rate of the whole country, Vietnam and Nam Dinh province in the period 2005 - 2015 Vietnam Nam Dinh Elasticity of public investment and poverty rate of the whole country - 0,000655 -0,001519 Elasticity of public investment and urban unemployment -1,076 -0,417 Source: Nam Dinh Statistical Office; General Statistics Office of Vietnam 2002, 2015 and calculated by the author 4. Discussion and Conclusion Economically, investment from the public and private sectors has different effects on growth, with private investment contributing more to growth than public investment. However, public investment in technical facilities and in people will increase the productivity of the private sector and thus benefit economic growth. In fact, over the past few years, the direct contribution of public investment to the GDP of Nam Dinh province is relatively low compared to the whole country. At the same time, the ICOR of public investment in Nam Dinh is quite high. This shows that Nam Dinh's investment policy in the past few years has not been effective. Moreover, the impact of public investment on growth is very low in relation to private investment. Although public investment has had a positive impact on the sectoral economic restructuring of Nam Dinh province, this shift is slow compared to the whole country. Therefore, the public investment policy of Nam Dinh should further promote its leadership in the process of economic restructuring; "Investing bait" or facilitating the premise towards a modern and flexible economic structure to meet the demand of fast and sustainable development. 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