THE VIETNAM PROVINCIAL COMPETITIVENESS INDEX 2008asiafoundation.org/resources/pdfs/PCI08Summaryreport.pdf · Mr. Nguyen Van Thoi National Assembly Member and Director of the Thai

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


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


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


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%


44.1%

53.3%

2.6%

NA


7.2%

92.7%

WWeeiigghhtteedd PPCCII

26.3%

50.1%

21.6%

1.8%

0.0%


43.6%

55.4%

0.4%

0.6%


15.9%

84.1%

TToottaall TTaaxx AAuutthhoorriittyy

25.9%

56.8%

17.3%

NA

NA


42.6%

52.8%

3.6%

NA


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%


8.6%

16.5%

44.3%

18.1%

8.2%

4.2%


34.8%

54.9%

6.4%

3.9%


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)


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.


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.


Figure 1:Weighted 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.


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.


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


Figure 3: Province Performance by Sub-index

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.


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.


Figure 5: Improvement in PCI Ranking Between 2006 and 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


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.


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


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.)


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


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.


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.



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


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.


Electricity Vietnam (EVN)


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


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.


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


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


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.


Figure 9: Final ICT 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.



Figure 10: Total Investment Environment