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| Blocks of stone used in a public investment project reinforcing the banks of the Tiền River in the southern Đồng Tháp Province. — VNA/VNS Photo Nhựt An |
What is your opinion about the approach that says public investment should be limited to make way for the private sector, as is the case in many countries worldwide?
Many people are indeed sceptical about the necessity to maintain a large amount of public investment for an extended period of time, as whether it is borrowed capital or funding from the State budget, public investment at the core is tax money. Therefore, they believe that investment from people’s taxes should be less, reducing the role of the State as an investor to make way for the engagement of the private sector.
This perspective is not wrong, but is only relevant for developed economies where the private sector has matured with sufficient financial resources, experience and credibility to mobilise funding. This is because investment in public structures and projects requires an extremely large amount of capital with a long payback period.
In small economies at the starting point of becoming developed industrial countries, there aren’t many large private enterprises yet, and therefore the State still has to act as the key investor for socio-economic infrastructure development, especially road and railway transport infrastructure.
Does that mean Việt Nam still needs to move forward with public investment in the near future?
Research on public investment worldwide by the World Bank shows that the public investment capital per capita, or the ratio of public investment over GDP (gross domestic product) in Việt Nam is very low compared to many other countries in the world and the region, despite nearly four decades of economic opening and reforms, continuously increasing public investment resources – including those from the State budget as well as preferential and commercial loans.
Việt Nam’s current socio-economic infrastructure remains delicate, lacking and incoherent, therefore there are abundant needs for investment. It will also take a lot of time to accelerate public investment for socio-economic infrastructure to meet development requirements.
Will an increase in public investment affect public and Government debts?
Post-COVID, public and Government debts worldwide increased sharply in both developed and developing economies. However, Việt Nam remains quite safe amid these tendencies. In 2022, Việt Nam’s public debt was equivalent to only 38 per cent of GDP. This figure is expected to fall between 39-40 per cent of GDP this year, far lower than the warning threshold of 55 per cent of GDP.
Similarly, Government debt in 2022 equalled 34.7 per cent of GDP, and is predicted to be around 36-37 per cent of GDP this year, far below the maximum threshold of 45 per cent of GDP. Meanwhile, foreign debt in 2022 was 36.8 per cent of GDP and will be around 37-38 per cent of GDP this year, while the warning threshold is 45 per cent of GDP.
Therefore, even if investment increases in the upcoming years, national financial security is still ensured. The key point is investing in what and which sector, and capital efficiency. If Việt Nam does not increase the speed of public investment, it will be difficult to achieve the country’s goal of escaping the middle-income trap.
Several economic experts said that Việt Nam’s public investment efficiency is quite low, given the high incremental capital-output ratio (ICOR). Will this efficiency decrease further if public investment increases?
The incremental capital-output ratio (ICOR) is a general economic indicator which refers to the number of investment units that are required to produce an additional unit of GDP. A low ICOR means high investment efficiency and vice versa.
ICOR is an indicator measuring the investment efficiency of the entire economy, but this is only one of many methods to evaluate public investment efficiency, as this is not only measured with profits but also the impacts of the projects and structures on society, and how they further attract private and foreign investments. In addition, many public investment projects cannot be measured in profits, such as those that tackle climate change adaptation, natural disaster mitigation, flood prevention, waste and wastewater treatment and others – this could not be measured in economic values.
Việt Nam is in one of the ten regions most negatively affected by climate change and sea level rise, and therefore whether we want it or not, continuous investment in this area with large amounts of capital is a must. Therefore, it is not difficult to see why ICOR in public investment is higher than in the private or foreign-invested sectors of other countries.
Compared to its GDP, Việt Nam’s total social investment capital is quite low and has hardly increased since 2011, remaining around 33-34 per cent of GDP. Its ICOR is between 5.5-6, except for 2020 and 2021 when this figure rose to 14.27 and 15.57 respectively due to the adverse impacts of COVID-19, then decreased to 5.13 in 2022. Therefore, there are perhaps not many concerns about the efficiency of investment in general or of public investment in particular.
What are the lessons learnt from public investment in the world?
We studied the public investment processes of 13 economies in the region, including Thailand, Indonesia, Malaysia and China, some of them becoming economic ‘dragons’ such as South Korea or Taiwan. When these economies were like ours now, they already maintained a minimum public investment of 7 per cent of GDP for a very long time, and it took 20-30 years for that to change the face of the economy.
Increasing public investment in the early stages of development, even if not resulting in miraculous growth, would help escape the middle-income trap. This is a useful lesson for Việt Nam to follow. — VNS
This article was first posted on Vietnam News