Tài liệu Fiscal decentralization at subnational government in vietnam

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INTRODUCTION The object of the research is the content of fiscal decentralization and the impact of fiscal decentralization to sub- national governance in 62 provinces during 1.Rationale of the research the period from 2004 to 2012. Fiscal decentralization theory focus on explaining the impact of fiscal decentralization and confirming that morefiscal decentralization given to the lowest 5. Methodology level of government will promote economic growth, decrease inequality through The thesis analyzes related regimes and policies to clarify the characteristics, efficient resource allocation and good governance. However, meanwhile many advantages and disadvantages of fiscal decentralization at sub-national government studies have concluded in favor of the positive impact of fiscal decentralization on in Vietnam. economic growth, studieson the impact of fiscal decentralization on governance come up withvarious results. Thesis using panel data regression (OLS, RE, FE) and dynamic panel data regression (system GMM) to assess the impact of fiscal decentralization at sub- In Vietnam, moststudies on the topic mainly analyze the current status of the national governmentto governance in Vietnam . contents of fiscal decentralization in order to propose solutions to improve the fiscal In combination with the result of quantitative analysis of the impact of fiscal decentralization system as perspecific period of time. Besides, studies on the impact decentralization to local governance, the thesis will use them as the basis to give of fiscal decentralization center around on the impact of fiscal decentralization to recommendations on the policy of fiscal decentralization in Vietnam. economic growth and poverty reduction, yet there is few research on the impact 6. Major findings fiscal decentralization to governance. The thesis sucessfully clarifies the impact of fiscal decentralization at sub- Based on theoretical and practical context of fiscaldecentralization in national government to governace as in the case of three – levels sub-national Vietnam, authors choose the theme "Fiscal decentralization at subnational government: (1) Confirm that the contents of fiscal decentralization has different government in Vietnam" as the subject of his doctoral thesis. effects on each aspect of local governance. (2) support fiscal decentralization theory : increased decentralization to lower government levelregarding providing goods 3. Aim of the research and services will help to allocate resources more efficiently even in case of 3- level The research aims to propose policy recommendations to fiscal decentralization at sub - national government level of Vietnam. As such, the thesis will answer the following questions: (1) The principle of deciding expenditure responsibilities and revenue among levels of government (2) Current status of sub-nation government. (3) Find out that outcomes of the effect of fiscal decentralization on local governance depend on the management of decentralized budgetfor each expenditure responsibility, the ability of upper government to control overlower government and capacities of the decentralized government. decentralized budget for sub - national governments in Vietnam? (3) How is the impact of decentralized expenditure and the degree of autonomy of sub - national government in general, that of provincial and district budget to governance (4) What are the solutions to improve fiscal decentralization system for sub - national government in Vietnam that helps to promote efficient allocation of public resources, ensure equity and improve quality of governance? In practice, the thesis has contributed some following new proposals: (1) Decentralizethe providing of public goods and services of local to district authorities does not require the advantage of scale. Transfer spending tasks that district governmentimplements inefficiently to the provincial government. Distribute expenditure responsibilities in detail for sub - nation government. (2) Adjustthe method of sharing value-added tax (VAT), corporate income tax (CIT) 4. Object and Scope of the research 1 between central budget and local budgets. Change royalties and taxes for 2 environmental protection to shared revenues among sub - government levels. indicator of public administration management from the aspect of public Develop a compulsory list of revenue that sub - national governments must comply participation, and transparency of the provisions of law (Huther and Shah, 1998; and an open list of revenue for local government to choose from and decide which DeMello and bärenstein, 2001). The conclusions on this relationship is quite revenues or tax rates to collect. (3) Determine the scope of sub - national diverse. government’s debt and debt limits should be built based on ability to pay debts. 7. Structure of the Thesis There are also many studies suggest that fiscal decentralization may harm economic efficiency, economic stability and good governance. According Prud The thesis is structured into 5 main chapters together with the introduction and conclusion part, including: (1) Chapter 1: Research topic overview. (2) Chapter 2: Theory of Fiscal decentralization. (3) Chapter3: Current situation of fiscal decentralization in Vietnam. (4) Chapter 4: Empirical Analysis of the impact of fiscal decentralization at sub- nationalgovernment to governance in Vietnam. (5) 'homme (1994), in many cases, fiscal decentralization is merely a process of extending democracy in politics, but it does not help to improve economic efficiency. Musgrave (1959) believes that it would be very difficult to enforce a uniform fiscal policy in the context of strong fiscal decentralization. Tanzi (2005) found a correlation between decentralization and corruption. Chapter5: Recommendations on fiscal decentralization atsub- national government 1.1.2. Empirical research on fiscal decentralization and governance in Vietnam. CHAPTER 1: RESEARCH OVERVIEW Reseach using multinational data:(1)De Mello and Bernstein’ research (2001) demonstrated the impact of fiscal decentralization to governance (2) Study 1.1. Internation researches on fiscal decentralization of Fisman and Gatti (2002) applied morecontrolling variables thanDe Mello and 1.1.1.Fiscal decentralization and social welfare, macreeconomic stability, Bernstein(2001) shows the decentralization of expenditure responsibility has a governance strong impact on curbing corruption. (3)Estache and Sinha (1995) also said that decentralization of expenditures increased infrastructure investment at sub national Overall, fiscal decentralization is supportedas it can improve the performance of the public sector, enhance social and economic welfare. At first, studies focused mainly on the theoretical aspects of economic growth when implementing fiscal decentralization as in the researches of Kim (1995), Davoodi, Xie and Zou (1995), Martinez-Vazquez & McNab (1998, 2001a, 2003), Zhang & Zou (1997, 1998), Lin and Liu (2000), McNab (2001), Desai (2003), Lee (2003). Although findings are inconsistent at some points but most studies show that fiscal decentralization makes positive impact to economic growth [6]. Secondly, fical decentralization assists macroeconomic stability by reducing information costs, operating costs in providing services, and promote the development of private sector if fiscal discipline is strictly followed (Shah, 2006a). Thirdly, fiscal decentralization has a positive influence on local governance. As such, the studies focused on the relationship between fiscal decentralization and corruption (Fishman government. (4) Study of Khaleghian (2003) proved fiscal decentralization strongly impact the results ofprevention in low-income countries. (5)Treisman (2002) added variable of autonomy to measure fiscal decentralization and came to conclusion that fiscal decentralization had a positive relationship with infrastructure and inversely with education and health. (6) The study of Huther and Shah (1998) shows that fiscal decentralization madepositive impact on the quality of state governance - as measured by: the participation of citizens, accountability, social justice, improving economic management and reducing corruption. (7)Dreher (2006) estimates the impact of fiscal decentralization to the quality of governance using control variables such as GDP, population, and intellecture. This study concluded that fiscal decentralization has strong impact in low-income countries but there is no clear evidence in the high-income countries. (8)Research of Andreas P. Kyriacou (2001) extended measuring governance quality by adding such variables as corruption, and Gatti, 2000; Gurgur and Shah, 2002), or regardedfiscal decentralization as an 3 4 administrative quality and more control variables, which also show a positive 1.3. "The blank" in research on fiscal decentralization impact of fiscal decentralization to governance. (9) The research of Adam et al Firstly, the preceding studies show trends of impact of fiscal (2008) which uses two-step approach also shows a positive impact of fiscal decentralization ongovernance is varied depending on the context of the study, decentralization on the efficiency of governance. thusit is impossible to applyextrapolate method for the impact of which for a The studies in certain country: (1) Lorenzo Boetti, Massimiliano Piacenza specific country. Secondly, the studies show the impact of decentralization of and Gilberto Turati’ research (2009) using data of 262 communes of Turin (Italy) revenue and expenditure responsibility to governance follows same direction. draws following conclusions: (i) the more autonomy over budget the less inefficient However, this can not be confirmed in the case that sub-national government is the spendings are. (ii) strict regulations on revenue and expenditure lead to increase organized into multiple levels. Thirdly, due to the lack of research on the impact of in spending efficiency. (iii) Accountability in implementing the budget has a major fiscal decentralization to governance, recommendations on fiscal decentralization impact on the efficiency of sub national government’s spending. (2) Research by policy is considered insufficient. Adam B. Elhiraika (2007) in South Africa, using data of 9 provinces during the CHƯƠNG 2: THEORY ON FISCAL DECENTRALIZATION period of 1996-2005, shows that decentralization of revenue have different impacts 2.1. Nature, form, and content of fiscal decentralization on education and health . 1.2. Research on fiscal decentralization in Vietnam Studies on the topic in Vietnam normally analyze the strengths and weaknesses of the fiscal decentralization system at certain content and propose policy recommendations to improve the system: Clay G. Wescott (2003), report of Adam Fforde (2003), the study of Jorge Matinez - Vazquez (2004), Le Chi Mai (2006), Bui Thi Mai Hoai (2009), Vu ThanhTuAnh (2011), To ThienHien (2012), Le ToanThang (2013). Other studies focus on evaluating the impact of fiscal decentralization to economic growth, poverty reduction as in the study of: LivBjornestad (2009), Nguyen Hoang Phuong (2008), Pham The Anh( 2008), Nguyen Phi Lan (2009), Hoang ThiChinh Thon et al (2010), Mai Dinh Lam (2012). These studies claim that more fiscal decentralization is given to sub - natioanl governemt will promote economic growth and reduce poverty. Regarding the impact of fiscal decentralized to governance, according to the author's knowledge, to date there has been only one study by Tran ThanhThuy (2012) examine the impact of decentralization to good governance, in whichthe only variable related to decentralization is used is the proportion of sub - national government’s revenue as of total state budget revenues. 2.1.1. The nature of fiscal decentralization Decentralization refers to the transfer of rights and responsibilities of central government to lower authorities. Fiscal decentralization is the transfer of power and responsibility related to budget management of central government to sub - nation government. Accordingly, the term fiscal decentralization emphasizes the allocation of revenues, expenditures responsiblity and the division of duties and powers (including the power of management and decision-making) among levels of government in managing the budget. 2.1.2. Forms of fiscal decentralization From the perspective of authority, fiscal decentralization can be in the form of: (1) Deconcentration: a form in which the administrative offices located in local area but they are branches of central government. (2) Delegation: means the central government transfer authority and responsibility of monitoring operating activities for sub - national government. However, the sub - national government is not fully independent yet subjectedto the guidance and control of central government to perform the tasks. (3)Devolution: implies creatingan independent unit fromthe central government. 5 6 local government, competition will arise and ensure supply at optimal level because 2.1.3. Contents of fiscal decentralization Based on the relationship among levels of government, fiscal decentralization comprises three following contents: (1) Determine the authority and responsibilities of levels of authorities in issuing the policy, regulations, standards and norms of state budget revenue and expenditure. (2) Allocation of revenues and expenditure responsibilitiesamong levels of authorities. (3) Determine the authority and responsibilities of levels of authorities in the budget cycle. the public can "vote by their feet" through moving to other locations. Tiebout model helps to form the principles to orientate the assignment of public goods delivery among levels of authorities. Brennan-Buchanan’ theory [54, 84, 87] Contrary to the theory on government of Musgrave- Oates, BrennanBuchanan (1980) develop Leviathan government model assumingthat the Based on the activities of the state budget system, the contents of fiscal organization is greedy and selfish. In this model, maximizing the benefits can be decentralization include: (1) the decentralization of expenditure responsibilities; (2) achieved if local government isauthorized to own economic resources. This model decentralization of budget revenues; (3) Transfer of funds between levels of does not show the principle of allocating revenue and expenditure responsibility but government; (4) Provisions on the possibility of borrowing and debt issuance of sub give explanation on the impact of revenue and expenditure to improving efficiency -nation government. and social welfare. 2.2.The views on fiscal decentralization 2.3. Measuring fiscal decentralization 2.2.1. Musgrave– Oates’ theory on fiscal decentralization [67, 74, 83] The indicators that are often used to measure fiscal decentralization including: the proportion of spending and income of sub - national government as Richard Musgrave (1959) suggest that the government has three functions: macroeconomic stabilization, redistribution of income, efficient allocation of resources. The division of functions of government that allows to narrow the scope of total state budget or GDP. Although widely used, but these indicators have limitations: they do not show the degree of autonomy of sub - national government in implementing expenditure and revenue [12, 63, 79, 100] and determine of responsibilities of spending and revenue among authorities. Wallace Oates (1972) has developed this approach to fiscal decentralization theory budget. Highlights of Oates theory is thatfiscal decentralization increases social 2.4. Impact of fiscal decentralization to governance 2.4.1. Governance and measuring governance welfare. Musgrave – Oates’ theory of fiscal decentralization delimit the the functions of government as follows: (1) Macroeconomic stability should be Governance is a concept related to all aspects of the exercising power assigned to the central government; (2) Re-distribution of income should be through formal and informal institutions to manage resources allocated to the state. allocated to central government; (3) efficient allocation of resources should be The quality of governance is determined by the impact of government activities on allocated to sub-national government. living quality of people (Huther and Shah, 1998). 2.2.2. Fiscal decentralization based on public choice theory’s theory [2, 87, 97] In Vietnam, the Provincial Competitiveness Index (PCI) is popular, reflecting the quality of governance. CPI is measured by 10 indicators [41]. Another indicator hasjust been used to evaluate the effectiveness of governance and public Charles. M. Tiebout (1956) found: due to lack of purchasing factor and administration at provincial level in Vietnam is PAPI. The index is developed from competitivenessthe public sector can not provide public goods at optimal level like the view of citizen on effective governance and public administration of the in the commodity markets. As such Tiebout claims that if public good is offered by provinces [42]. 7 8 2.4.2. Positive and negative impact of fiscal decentralization to governance Positive impact of fiscal decentralization to governance First, sub nation goverment has the advantage of meeting the needs of the people, especially when the supply of public goods and services funded by taxes 3.2. Situation of fiscal decentralization at sub - nation government in Vietnam 3.2.1. Decentralization of expenditure responsiblities for sub- national government collected from local people (Oates, 1999). Second, decentralization improves the behavior and attitudes of the local politicians (Bardhan and Mookherjee, 2006). Third, fiscal decentralization promote participation, social justice, improving Scope of expenditure responsibility of local budget  Scope of expenditure responsibility of local budget: economic management, increase transparency, reduce corruption, institutional Local budget’s primary responsibilities tend to increase in the provision of quality and governance quality (Huther and Shah 1998; Kyriacou and Sagales, basic public services. Considering the proportion of recurrent expenditure by sector 2009; Mello, L., 2011). Fourth, fiscal decentralization is a condition for sub- as of total local budgets also showed that education, health, economics and business national government to make effort, even break through in implementation of administration accounted the largest propotion. central policies to achieve their goals.  Decentralization of expenditure responsibilities among provincial, Negative impact of fiscal decentralization to governance district and commune level First, tax competition can drive tax, or public spending below the social Fiscal decentralization among levels of sub-nation government has some optimum (Oates, 1999; Cai and Treisman, 2005) [69]. Second, Oates (1985) following features: First, decentralization to district and commune levels is suggest that more fiscal decentralization will lead to budget losses due to increasing limited: Although the level of the budget decentralized to the district level tend to the size and cost of government administration. Third, corruption may increase rise but expenditure spent by district budget accounts for only almost 40% of total when implementing fiscal decentralization, especially for developing countries local budget, while that of provincial budget still accounts for over 60% of local (Tanzi, 1995b). budgets. Decentralization of expenditure responsibilities among different levels of local budget are as follows: (1) decentralization of investment expenditure funded CHAPTER 3: CURRENT SITUATION OF FISCAL byin balanced investment capital: in the poor provinces, this responsibility is mainly DECENTRALIZATION IN VIETNAM allocated to provincial government; in those of higher economic development level the responsibility is assingned clearly and in detail for 3 levels (2) decentralization 3.1. Economic context and budget revenue and expenditure for the period of 2004-2013 of investment expenditure funded by targeted capitalis normally assigned to provincial level to support general program. (3) decentralization of recurrent The growth rate of GDP during the period of 2004 - 2013 reached 6.23%. Inflation rose: in 2010, the inflation rate was 11.75%, 18.13%, and 6.81% in 2011, 2012 and 2013 respectively.Regarding state budget revenue, the average size of 2004-2013 period reached 24.9% as of GDP. Regarding expenditure, average total expenditures per period 2004-2013 reached 29.0% of GDP. Regarding the structure, state budget expenditures have changed towards gradually reducing the size of expenditure for healthcare: 15 provinces allocate this responsibility for the provincial budget, and not for district and commune budget; 16 others decentralized to the provincial and district; 26 decentralizefor all three levels, and 6 allocate to provinces and communes, but not for districts. (4) decentralization of recurrent expenditure for education and training: the majority of localsallocate the responsibility of expenditure forsecondary schools; elementary schools, preschools, development investment expenditure, while increasing recurrent expenditure. 9 10 and cultural enrichment to district level. High schools and regular education are 3.2.2. Decentralization of revenue for sub - national government allocated to the provincial level. There are many other locals sharing the responsibility between the provincial and district levels for general education and elementary enrichment. In particular, Tra Vinh is the local that does not Decentralization of revenue for sub national government  Allocation of revenue for local budget decentralizethe responsibility to district and commune level. Expenditure for Revenue that local budget has 100% entitlement:(1)Revenues from housing training is allocated to provincial level; vocational training centers and other forms and land: total revenue from land as of total local revenues as decentralized of training, short-term training are allocated to district level, commune is not experienced a decline from 26.7% in 2004 to 19.2% in 2012 due to dependence on decentralized for these tasks. Second, the transparency and clarity in allocating land use fee revenues . This revenue is allocated to threelevels of sub - national expenditure responsibilities remain low. The unclear delineation of expenditure government: provinces, districts and communes but more is allocated to the responsibilities among budget levels reduces spending efficiency, especially when provincial and district budgets. (2)Registration fees: accounted for an everage of different levels of sub national government must work together in a jointly task. about 4% local revenue, are often decentralized 100% for district budget, in which the land registration fee is usually delegated to the commune budget. (3)Excise: Autonomy of sub - national governments in spending management and decision making Autonomy ofsub-national governmentsfeatured by: (1)sub-national government has authority to issue regulations and policies on expenditure yet only responsible for enforcement and compliance. (2)In terms of recurrent expenditure, sub national governments are active in budget planning, implementing, but still dependent on their upper authorities. (3) For developmentexpenditure, the local is activein allocation of capital plan and assign capital to each project. Decentralization of spending responsibility at all levels of sub-national proportion of this revenue is less than 1% of local revenues: communal budget entitle to excise paid by individuals, households; district and provincial levels enjoyed the rest. (4)Fees and charges: there are more than 290 types of fees and charges with revenues account up to more than 4% of total local revenues and are decentralization among levels of sub national governmentin form of which level collect the revenue will enjoy that. Allocation of revenue among provincial, district and communal budget governmentis facing some problems: (1) there is a mismatch between spending and In terms of scale, locals tend to increase revenues for the provincial budget revenue. This is a consequence of the increased decentralization of spending tasks and reducing the district budget revenues by reducing revenues that provincial and while revenues remain centralized. (2) Regional inequality or horizontal fiscal district budgets enjoy 100% entitlement, increasingshared revenues between the imbalances is high.(3) Lack of clarity and overlapping in the allocation of provincial budget and district budgets. The localities have high levels of autonomy expenditure responsibilities among provincial level, district level and communes. over budget tend to focus local revenues for the provincial government, while those That an expenditure responsibility is assigned simultaneously for all three levels is of low level of autonomy over budget and are dependent on central budget tend to common. (4) Decentralization of some expenditure responsibilities is considered decentralize more revenue for lower authority. inefficient: such expenditures as social sercurity, price subsidies, population and As per assessing the degree of autonomy over revenue, it shows that the family planning, training. (5) Lack of mechanisms to ensure efficient allocation of degree has decreased markedly over the years. The degree of autonomy over budget among sub national governments. revenueof provincial budget tends to improve while that of district budget tend to decrease over the years. Even for locality of which district budget of highest 11 12 autonomy level over revenue can guarantee only about 60% of district expenditure like in Ben Tre, Tay Ninh, Binh Duong, Da Nang. Decision making of sub - national government over revenues Similar to decentralization of expenditure, in principle levels of sub national government do not have the authority to enact policy on collection of revenue which is different from those enacted by central government. But in fact, local government may affect a certain number of revenues. Therefore, in the future, it suggested that more power to decide on revenue should be given to sub - nation government by allowing sub - nation government to decide the tax rate within the frame specified by the central government. 3.3. General assessment of fiscal decentralization in Vietnam Fiscal decentralization of local budget has the following advantages: First, fiscal decentralization for sub-national government is getting stronger. Second, provincial government has been granted greater autonomy over managing local budget. Third, the assignment of expenditure responsibilities, especially the duty to provide public services to local budgets of all levels have ensured the conformity of the "scope of benefits" of that provided by sub-national government. Fourth, decentralization of local revenues for all sub-national government levels is relatively consistent with the characteristics and nature of revenues in terms of efficiency standards and fairness. Fifth, transfer among budget levels helps to improve vertically and horizontally budget imbalance. Sixth,fiscal decentralization 3.2.3. Transfer forsub - nation government has strengthened fiscal discipline. The scale of transfer for sub-national government tends to rise over the The limitations of fiscal decentralization: First, vertically and horizontally years, reflecting the target of support for local to ensure the implementation of the fiscal imbalance happen at all budget levels. Second,decentralization of expenditure tasks assigned. Similar to local budgets, the district budget and commune budget responsibility is still overlapping, lack of transparency and ineffective. Third,the depend mainly on balancing transfer from the provincial budget and tend to rise in allocation of some revenue to local budgets is not suitable to the characteristics and recent years. Current transfer system reveals some issues to consider: (1) the district nature of revenues. Fourth, transferamong local budgets of all levels increased and commune levels are too dependent on transfer. (2) The system of criteria and dependence on the upper government’s budget. Fifth, the scope of debt has not norms for the current budget allocation is still based on the targets and inputs. covered all debt repayment obligations of sub-national government although (3)Poor localities heavily rely on targeted transfer to meet the investment needs in borrowing limits are established but not yet linked to fiscal discipline of local the area. budgets. CHAPTER 4: EMPIRICAL ANALYSIS OF THE IMPACTS OF 3.2.4. Local debt FISCAL Borrowing of sub-national government shows some problems as follows: (1) DECENTRALIZATION ON GOVERNANCE ATSUB- NATIONAL GOVERNMENT IN VIETNAM existing mechanisms of asking and giving in borrowing. In many cases, the use of debt is for debt repayment of outstanding capital investment. (2) The scope of debt 4.1. Empirical hypotheses does not cover all debt obligations of the local. (3) Unclear regulation about who is The theory of fiscal decentralization showed that assignment of expenditure the ultimate person responsible for the debts. (4) Many local established investment responsibilities for sub-national government will improve the effectiveness of development funds in order to mobilize resources for development investment. (5) public good and service delivery, improve transparency, reduce corruption and According to law, source of repayment of principal and interest is guaranteed from transaction cost. Therefore, the first hypothesis (1a) is that allocation of the provincial budget, which creates a risk of future deficits by spending part of the expenditure responsibilities for province and lower levels has positive impact on the current budget to pay debt. effectiveness of public good and service delivery; the second hypothesis (1b): 13 14 allocation of expenditure responsibilities for province and lower levels has negative GDP to reflect fiscal decentralization according to province and lower levels. We impact on the institutional performance of provinces; and the third (1c): allocation also use the rate of sub- national decentralized revenue by the sub- national of expenditure responsibilities for province and lower levels has negative impact recurrent expenditure, the rate of provincial decentralized revenue in term of on the efficiency of public administration of provinces. provincial current expenditure, the rate of district decentralized revenue by district Increasing revenue autonomy at province and local levels in order to expenditure to measure the revenue autonomy or the vertical fiscal imbalance of fundexpenditure responsibilities will create the motivation for the province and provinces and lower levels. lower government to distribute effectively the public service, to save administrative 4.2.3.Variables of governance of province or sub-national government cost and to reduce corruption (Oates, 1999; Fisman and Gatti, 2002). However, in the perspective of developing countries, fiscal decentralization has negative impact and destroy the monitoring and controlling of central government over province goverment resulting in the increase of corruption (Tanzi,1995b). In particularly, the motivation of corruption will be higher in poorer areas. Therefore, the next hyphothesis (2a): fiscal automomy has positive impact on delivery of public service of provinces; hyphothesis (2b): fiscal automomy has positive impact on institutional performance of provinces; hyphothesis (2c): fiscal automomy has positive impact on efficiency of public adminisstration of provinces. Labor training and infant mortality rate measure the effectiveness of public service delivery;the higher value of labor training is the better quality of public service supply; the lower value of infant mortality rate is the better quality of health service provision. The institutional performance is measured by informal charges, transparency, land access and security of tenure. The efficiency of public administration is measured by time costs. All the above proxies are the indicators of PCI Vietnam from 2006-2012. The higher of proxy value is the higher quality of governance. 4.2.4. Control variables 4.2. Data and variables We use the provincial population variable to control the characteristics of 4.2.1. Data population scale of provinces; the population data is the statistics data of job and The data for fiscal decentralization is budget disclosure of final account of 62 provinces from 2004 to 2012. The data is available in ministry of finance website. population of General Statistics Office from 2005-2012. We also use the proactive indicator of PCI Vietnam as a controlvariable to reflect the difference of the GDP, private capital, population and infant mortality rate by province are creating and autonomy of province leaders. According to FismanandGatti (2000), from the data disclosure of General Statistics Office of Viet Nam and from 2004 - we controlled the literacy of people in a province by the rate of literacy of the 2012. The population and infant mortality rate are in 2005 and from 2007-2012. population above 15 years old. We also used the variable of the rate of private capital by GDP in order to expressing the openness of provincial economy. Provincial governance indicators are from Provincial Competitive Index (PCI Vietnam) from 2006 -2012. PCI Vietnam is built from the result of survey of approximate 10000 companies and enterprises. 4.2.2. Variables of fiscal decentralization at province and lower levels As per IMF’s measure of fiscal decentralization, we use the proportion of 4.3. Research methodology 4.3.1.Regression panel data: In regression panel data, 3 models are used popularly as Pooled Ordinary Least Squares (POLS), Fixed Effect Model (FE), and Random Effect Model. sub-national expenditure, provincial expenditure, and district expenditure in term of 15 16 According to Mello andBarenstein (2001), Kyriacou (2001) we started by a simple 4.4. Empirical results regression model as follows: 4.4.1. Descriptive statistics ‫ݕ‬௜,௧ = ߙ଴ + ߙଵ ܺ௜,௧ + ߙଶ ܼ௜,௧ + ‫ݑ‬௜,௧ (4.1) Descriptive statistics data showed that: sub-national expenditure, provincial Variable ‫ݕ‬௜,௧ is quality of governance of province i;variableܺ௜,௧ reflect fiscal decentralization of province i; Variable ܼ௜,௧ is controlled variables;‫ݑ‬௜,௧ is errors. expenditure, district expenditure account for 32%, 15%, and 13% asof provincial GDP respectively.Vertical fiscal imbalance reflects the revenue autonomy and the We use Lagrangian Multiplier - LM test to choose the suitable model vertical fiscal imbalance at sub - nation, province and district level is 0.92, 0.58 and between POLS and RE (Breuschand Pagan, 1980). Then, if the result of LM test 0.3 respectively. These figures show that the central government strongly transfers rejects Ho, RE model will be chosen and we continued to use Hausman testfor their revenue to sub - national governments but the transfer from province to lower comparing between RE model and FE model (Hausman, 1978).The most suitable levels is quite lower. model is tested by Wald test for heteroskedasticity in case of FE model and tested Exception of the correlation of fiscal decentralized variables, the correlation by Wooldridge test for autocorrelation in panel data. The model will be adjusted by coefficients between independent variables are quite low (< 0.5) and the regression robust standard errors method if it got heteroskedasticity or autocorrelation. model will not get the multicollinearity. However, the correlation coefficients of fiscal decentralized variablesare high (>0.8) shows the multicolinearitywill happen 4.3.2.Regression dynamic panel data: in regression model of these variables. In order to solve this problem, we will The disadvantage of the POLS, RE, FE regression models is not handled on the endogenous.In order to solve this problem, Arellano and Bond (1991) proposed to use the model of Difference Generalized Method of Moment (Difference GMM).However, Blundell and Bond (1998) showed that the Difference GMM is explore the impact of each fiscal decentralized variable on governance variables. In addition, we use the variance inflation factor test for the multicollinearity. The results are smaller than 10 reflecting that the multicollinearitywill not happen in the using data (Kennedy, 1992) not effective and the instrument variables are not strong enough when dependent variable got high correlation value between the current value and its value of previous period and the period number is small.Blundell and Bond (1998) expanded 4.4.2. Regression results The impact of fiscal decentralization on public service delivery the model GMM (1991) by using 2 models at the same time: (i) the model uses the lagged variables of the difference in order 1 of independent variables as instrument variables; (ii) the difference model use instrument variables by the lagged variables of explanation variables (including the lagged variables of dependent variables).Therefore, the model GMM (1998) or the model system GMM will be The impact on Labor Training: (1) decentralization of revenue and expenditure of sub- national government, revenue decentralization at district level, the active of province governmenthave positive impact on the quality of labor training service; (2) population does not clearly impact on labor training service; (3) the rest variables have no impact on labor training service.The impact on Health used. Service: (1)decentralization of revenue and expenditure of sub- national We also use Sargan and Hansen test for the overidentification and the Arellano - Bond test for the autocorrelation of the system GMM. government, expenditure decentralization at district level have negative impact on infant mortality rate showed the positive impact of fiscal decentralization on the quality of health service; (2) the dynamic model confirmed the impact of literacy variable on governance variables. 17 18 The impact of fiscal decentralization on the institutional performance The impact on Informal Charges: the decentralization of revenue and expenditure of sub- national government have negative impact on the informal charges. However, the dynamic model has not showed the evidence of the impact of provincial and district fiscal decentralization on the informal charges as the results of OLS, RE, FE models. In addition, the dynamic model also confirms the negative impact of private capital on informal charges. This result explained for the changes of the informal charge indicator from the demand side: the more private capital invests, the more opportunity of informal charge happens. The impact on Land Access and Security of Tenure: the fiscal decentralization of sub- national government, the expenditure decentralization at provincial level and population has negative impact on the indicator of Land Access and Security of Tenure; the proactive of province has positive impact on this indicator. The dynamic model showed the expenditure decentralization at district levels and private capital has negative impact on the indicator of Land Access and Security of Tenure. The impact on the transparency: the revenue decentralization of sub- national government and at district level has positive impact on the transparency. The results confirm that the sub-national government and lower levels assigned revenue sources 4.5. The results of empirical analysis 4.5.1. Conclusions of empirical analysis The first, expenditure decentralization has positive impact on public service delivery of sub-national government. However, the impact of district expenditure decentralization on labor training service is different from the impact on health service.The second, expenditure decentralization at sub-national levels have negative impacts on the institutional performance that proxies by variables of Informal Charge and Land Access and Securityof Tenure; in the meantime, there is no evidence for the its impact on the variable of transparency. The third, the fiscal autonomy has positive impact on public service delivery; it has negative impact on variables of the Informal Charges and Land Access and Securityof Tenure, but it has positive impact on the variable of the transparency.The fourth, the quality of the research will be improved when the governance indicators are measured from the citizen's view and future researches are suggested to solve this implication. 4.5.2. The contributions of fiscal decentralization literature The research result contributes to clarify the impact of fiscal decentralization in case of the sub-national government including 3 levels as follows: will stimulate sub-national government to improve the transparency in their (1) Finds the contents of fiscal decentralization have the different impacts on activities. the aspects of the governance of sub-national government. The impact of fiscal decentralization on the efficiency of public administration (2) Confirms the effectiveness of resource allocation of sub-national government is improved when we assign public service responsibilities for lower The active of the government and the literacy have positive impact on the levels in case of the sub-national government including 3 levels. time costs. However, the OLS model showed the provincial expenditure (3) Finds the results of the impact of fiscal decentralization on the decentralization has negative impact and the provincial revenue decentralization has governance are dependent on which expenditure responsibility is assign for sub- positive impact on the time cost; but the revenue decentralization at levels have national levels, on the controls of the superior or higher level government, and the positive impact on the time cost in the dynamic model. capacity of decentralized government. 4.5.3. The policy implication for fiscal decentralization in Vietnam (1) Transfers more expenditure assignment for lower government in public service delivery. (2) Improves the vertical fiscal imbalance of levels of sub- national 19 20 government by assignment of the revenue according to expenditure assignment, or 5.2. Recomendations for the reform of fiscal decentralization at all levels decrease of expenditure assignment for them or using the both ways. (3) Improves of sub-national government the fiscal autonomy of levels of sub-national government by giving sub-national government more the authority of decisions meanwhile strengthening capacity of According to McLure and Martinez-Vazquez (2003), assignment of the administration system at all levels of sub-national government. CHAPTER 5: RECOMMENDATIONS DECENTRALIZATION OFSUB-NATIONAL FOR 5.2.1. Recommendations for assignment of expenditure responsibilities FISCAL GOVERNMENT IN expenditure responsibilities is considered principals as follows: (1) compliance the criteria of effectiveness; (2) the central government should be assigned the expenditure responsibilities of redistribution and macroeconomic stability;(3) VIETNAM assignment of expenditure responsibilitiesis flexible; (4) assignment of expenditure 5.1. The fiscal decentranliztion orientations 5.1.1 The principals of fiscal decentralization responsibilitiesis clarified and maintained in long term. Therfore, recomendations for assignment of expenditure responsibilities as follows:First, determines core expenditure assignments of each level of sub-national government included current The first, fiscal decentralization is considered as a process in the relationship of the administrative decentralization. The second, all levels of sub-national government should be increased the responsibilities in budget management. The third, the vertical fiscal imbalance should be decreased or allocation of revenue based on the expenditure assignment at all levels of sub-national government. The fourth, fiscal decentralization is ensured by the enhancing fiscal transparency. The fifth, fiscal decentralization is combined with the strengthening the monitoring and expenditure and capital expenditure. Second, transfers the expenditure responsibility of social equality for central government.Third, clarifies the assignment of expenditure responsibilities between levels of sub-national government.Fourth, give province a higher of autonomy in expenditure decision.Fifth, enhancing the accountability of all levels of sub-national government to their expenditure. Sixth, clearly assigns and controls capital expenditure at levels of sub-national government to ensure fiscal discipline. evaluation system. 5.2.2. Recommendation for revenue decentralization 5.1.2. The orientations of fiscal decentralization in sub-national According to Martinez-Vazquez and Boex (2001), some principals of government revenue decentralization are: (1)revenue assignmentshould encourage the link The first, the integration of budget system at all levels of government should between payment and benefits received;(2) the tax base of revenue sources is be eliminated. The second, the assignment of expenditure responsibilities between similar between levels of sub-national government should be clarified. The third, sub-national competitiveness;(4)revenue decentralization does not increase compliant and government should be given a higher of the decision and management authority of management costs; (5)local tax base is required unchanging in long term;(6)local revenue sources. Thefourth, the intergovernmental transfer system should be based taxation is clear and transparent. on the transparent and effective formula. The fifth, sub-national governmentshould be required more accountability in borrowing. provinces; (3)revenue decentralization should limit tax Reform revenue decentralization for levels of sub-national government:(1) change the shared method of VAT: VAT should be shared for provinces by its population adjusted coefficient of buying or expenditure. Corporation tax of companies, which accounts like the whole industry, should be transformed to shared 21 22 tax due to the equality. (2)Tax of special consumption should be assigned to central government.(3) District and commune should be given more revenues which they "own" 100%. Tax of natural resources and tax of environment should be shared between levels of sub-national government. (4) Reform the system of fees and charges in which the rates is simple and effective. The Law of fees and charges should be substituted for current document under law of fees and charges. (5) Provincial government should be given a higher of decision authority of revenue resources. In long term, a "closed" list of compulsory levies and an "opened" list of CONCLUSION The dissertation analyzed the assignment of revenue and expenditure responsibilities and contents related to decentralization at levels of sub-national government; estimates the impact of fiscal decentralization on the quality of governance. We suggested to reform the fiscal decentralization in Vietnam based on the findings of advantages and disadvantages of fiscal decentralization and estimated results of the impact of of fiscal decentralization on the quality of governance. levies in which provinces can free pick and decide the tax rate. (6) Strengthening the system of monitor and control and enhancing the participation of citizen in revenue management process. 5.2.3. Reform the intergovernmental transfer system First, the intergovernmental transfer budget should be decided by a given formula.Second, upgrades principals and criteria of targeted transfers. Third, finds a way to transfer the revenue of rich province to central government in stable period. Fourth, the attitude looking for transfer budget of levels government is restricted. 5.2.4. Reform debt management of sub-national government (1)Borrowing of sub-national government is necessary, therefore, the State Buget Law (2015) claims sub-national budget deficit is suitable (2) Sub-national government should be clearly given responsibility of borrowing. (3) Maintaining the size of debt at the safe level by implementing borrowing ceiling formulated on payment capacity. (4) Enhancing monitor and risk management system of provincial debt. (5) Determining the scope and treatment of debt which is not included in provincial debt by law. 5.2.5. Supporting solutions (1) Applying the Middle Term Expenditure Framework for budget planning (2) Implementing the budget management oriented output in public organizations. (3) Enhancing the system of monitoring and evaluating of public expenditure. (4) Enhancing transparency of budget process and budget accountability. 23 24
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