The Impact of Governance Effectiveness on Economic Growth: Insights from the Vietnam Provincial Competitiveness Index 2007-17.

• Author: Hartley, Kris

1. Introduction

   In Vietnam and across Southeast Asia, globalization and domestic political pressure are motivating provincial governments to improve economic competitiveness (McKinnon 2017; Park, Hill, and Saito 2012; Vu and Haughton 2004). Decentralization (1) grants provincial and subnational governments at varying scales the autonomy to pursue such policy ambitions. The experience of decentralization also presents research opportunities to observe and compare the impact of governance quality on economic growth, as national-level variables are constant while differences in subnational variables differ.

   In Asia's developmental states, central governments have historically intervened to foster economic growth but have more recently embraced decentralization as an alternative pathway (Shair-Rosenfield 2021; Carino 2004). According to Leftwich (1995), economic growth in developing countries is shaped not only by governance and administrative structure but also by political system type. With a historically developmentalist orientation and unitary political and administrative apparatus (e.g., provincial leaders are appointed by the central government), Vietnam has leveraged its 1986 Doi Moi (renovation era) economic liberalization reforms to foster high levels of economic growth. However, this growth is geographically heterogeneous due in part to weak strategic coordination from the central government (Vu 2015). Over the past three decades, some provinces have maintained rapid economic growth, others have moved from laggards to leaders, and the rest linger in stagnation. At the same time, the Doi Moi era has been characterized by institutional fragmentation that weakens decentralization efforts and limits their scope (Anh 2016) while hindering economic growth (Pincus 2015). Geographically imbalanced growth of this sort invites comparative research about whether and how provincial governments use bounded autonomy to foster economic growth, with lessons for governance practice at multiple scales.

   As liberalizing developmental states continue to undertake decentralization into the twenty-first century, subnational governance effectiveness is becoming an increasingly important research topic--particularly as the limitations of centralized and top-down governance are better understood (Anh 2016; Pincus 2015). Subnational governments must maximize policy effectiveness through autonomy that is bounded by time-variant levels of decentralization. As such, working effectively with central government drafted legislation (hereafter central law) and applying creative policy solutions to business problems are two of many dimensions of governance effectiveness. Creativity, particularly for interactions between government and the private sector, is seen as an essential characteristic of effective governance. According to Evans (1998), "making sure that government-business relations continue to contribute to economic growth, like maintaining the calibre of the bureaucracy itself, will require constant, contentious effort combined with unflagging creativity, in East Asia as in other regions."

   This study examines the impact of provincial governance on provincial economic growth through a fixed effects regression model on panel data across eleven years for all of Vietnam's sixty-three provinces. These data have enough variation across time and cases to empirically justify the econometric method selected. Results reveal a significant relationship between economic growth and governance effectiveness (operationalized as efficacy at working with central law and creativity in addressing business problems) for industrialized provinces only. An interaction term shows that the marginal effect of governance effectiveness diminishes as industrialization level decreases. These findings suggest that narratives built around the value(s) of creative and innovative governance should be taken with some caution, as structural factors and other disadvantages in less industrialized regions can neutralize the effect of governance effectiveness on economic growth. These findings raise theoretical questions about growth-enabling conditions in developing economies and reveal opportunities for further research and policy options, matters addressed in the conclusion.

2. Literature Review

   Studies about the impact of governance on economic growth are numerous (see Yerrabati and Hawkes (2015) for a review of studies in Asia, and Vu and Hartley (2019) for a comparative study of economic "catch-up" in Asia's developing economies). To this literature, this study contributes a nuanced empirical examination of the governance-growth link in the relatively underexplored context of Vietnam. The study asks whether and to what extent provincial governance practices in working with central laws and pursuing creative policy solutions to business problems impact economic growth. Accordingly, the article makes an empirical and theoretical contribution to the literature about decentralization and economic growth. To properly situate the study's contribution, this literature review focuses on studies of provincial economic competitiveness in Vietnam, creativity in economic governance and policy, and elements of decentralization relevant to developing countries.

   The findings of this study can help enrich understandings about development policy in economically liberalizing developmental states like China, whose decades of experience in economic reform have often served as a model for Vietnam. Some studies of China have identified a positive link between governance quality and economic growth at the provincial level (Liu et al. 2018; Hasan, Wachtel, and Zhou 2009), while Wilson (2016) finds no such association, and Glawe and Wagner (2020) find a positive association only in coastal provinces. Studies similarly linking governance characteristics to economic development in Vietnam (Table 1) have addressed a variety of growth determinants including trade liberalization (Dang 2010), foreign investment (Dang 2013), institutional reforms (Tran, Grafton, and Kompas 2009), and infrastructure (Hoang n.d.). To the literature, this study adds evidence concerning characteristics of governance (i.e., creative and innovative governance) that are relevant in rapidly developing economies undergoing devolutionary reforms. In accordance with the variables used in this study, the remainder of this literature review examines studies of provincial competitiveness in Vietnam, governance creativity, and decentralization.

   2.1 Studies of Provincial Competitiveness in Vietnam

   For subnational governments, planning for economic growth is an increasingly vital policy task given continued decentralization and heightened pressure on localities to support national economic competitiveness (Kamal-Chaoui and Sanchez-Reaza 2012). The survey-based Vietnam Provincial Competitiveness Index (PCI) was developed in part to better understand this phenomenon and has since been used in numerous studies. For example, Malesky and Taussig (2009a) find through PCI data that improved institutional conditions at the provincial level increase the likelihood that informal business enterprises engage the formal market. The same authors (2009b) use PCI data to find that profitable firms in Vietnam often bypass the formal banking sector in favour of obtaining capital through the informal sector. Through PCI data, Thai and Le (2012) explore how public administration characteristics and provincial competitiveness impact per capita GDP, citing the relevance of legal institutions, reforms, and leadership. Nguyen, Mickiewicz, and Du (2018) find that local business environments and transaction cost structures are shaped by local governance quality as measured by the PCI and by informal institutions as measured by cultural factors. Other PCI-based studies have revealed counterintuitive associations, including the insignificant relationship between effective economic governance and higher rates of FDI (Chien and Zhang 2012), the inverse relationship between competitiveness and FDI (Chien and Zhang 2012), and the inverse relationship between transparency and private investment (McCulloch, Malesky, and Nhat 2013). To this literature, this study adds an empirical investigation of governance differences across Vietnam provinces with varying levels of industrialization, and tests in particular the common claim that public sector creativity is necessary for economic growth.

   2.2 Governance Creativity

   Creativity (one of the two interest variables of this study) can be considered one among many elements or drivers of governance effectiveness. The literature has often examined governance creativity as an incidental phenomenon--in reference to a particular policy idea rather than a governance habit or characteristic. Examples are numerous and contextually varied: the role of innovative policy at the implementation stage of environmental risk mitigation in the United States (Meo, Ziebro, and Patton 2004); political dynamics between central and local government in the development of the London Docklands (Smith 1991); community development and poverty alleviation in the United States (Oakley and Tsao 2006); centre city redevelopment and "empowerment zones" in Baltimore, USA (Clinch 2008); and housing improvement and urban regeneration in Scotland (Bailey and Hastings 2004).

   Despite the value of these studies, examinations of site-level creativity often fail to provide deeper insights into systemic characteristics underlying policy creativity. Creativity is a concept not only measurable through the content of policy but also through processes such as soliciting public input, developing policy alternatives, and evaluating outcomes. For example, Healey (2004) explores governance creativity through three modes: specific episodes, governance processes, and governance cultures. The few studies focusing on governance creativity as a systemic...