For Vietnam, defining effective public spending not easy

The government wants to call off ineffective public projects to fight inflation – if it can make up its mind what constitutes “ineffective.”

The Vietnamese government invests public money for non-economic reasons too often, Harvard University economist David Dapice says.

In an essay outlining strategies for the country’s socioeconomic development, Dapice says the government’s plan to spend $33 billion to build an express railway from Hanoi to Ho Chi Minh City is not a good one as costs are likely to outweigh benefits.

If Vietnam manages to secure a $33 billion loan for 30 years for the railway project, Dapice points out it will have to pay $1.1 billion every year towards just the principal while the railways’ annual revenues are less than $300 million.

The United Nations Development Program’s chief economist in Vietnam, Jonathan Pincus, agrees.

Pincus says those who want to travel quickly from Hanoi to HCMC would choose to fly.

“This project is too costly,” he says.

Vietnam only needs to upgrade its railway system to transport cargo, something India has spent $5 billion to do, he says.

PROJECTS LIKELY TO BE DEFERRED

The Ministry of Planning and Investment plans to delay seven major projects – four in Hanoi and three in HCMC – that it considers not urgent.

1. National Assembly headquarters, Hanoi.

2. National History Museum, Hanoi.

3. Ministry of Foreign Affairs office, Hanoi.

4. Several projects to celebrate Hanoi’s 1,000th birthday.

5. Ben Thanh – Suoi Tien railway, HCMC.

6. Phase II of the project to improve HCMC’s waterways.

7. Dong Tay (East West) Highway.

“Vietnam should learn from the Indian example.”

Norio Hattori, former Japanese ambassador to Vietnam, told a local newspaper that express trains, which traveled at 300 km per hour at most, could not compete with airplanes.

Therefore, instead of building a 1,800-km express railway to connect Hanoi and HCMC, he suggested running express trains over shorter distances – such as from Hanoi to Vinh or HCMC to Nha Trang.

Despite experts’ warnings, however, the government is going ahead with the project which it hopes will be financed by Japanese loans.

Experts say Vietnam is investing inefficiently since it spends 42 percent of GDP to sustain the same growth level as Taiwan which spends only 29 percent.

Vague

Cutting down on ineffective public spending is one of the measures the government promises to execute to combat inflation.

But the government is yet to answer how it will cut ineffective spending while encouraging projects conducive to long-term economic growth.

Though the Ministry of Planning and Investment plans to review all public spending next month, it has not spelled out the criteria for “ineffective” investment.

This has sparked off disagreement between the ministry and the Hanoi City government.

The ministry considers Hanoi’s numerous projects to celebrate its 1,000th birthday in 2010 among the “inessential” investment that can be put off.

The city, on the other hand, is concentrating its resources on these projects, which are estimated to cost VND25 trillion (US$1.5 billion).

The first few projects, to cost VND2 trillion, are set to kick off this year.

While the country is yet to agree on what constitutes ineffective investment, international experts stress government spending is not driving inflation or overheating the economy.

They point out that the budget deficit was only 1 percent of GDP last year.

The World Bank’s chief economist in Vietnam, Martin Rama, warns that a steep cut in government spending in the face of declining exports may hamper the economy.

Ayumi Konishi, president of the Asian Development Bank in Vietnam, calls for a cut in public investment but cautions against its possible effects on growth.

Vietnam must invest wisely and should not neglect projects that help foster medium-term growth such as infrastructure development, he says.

Foreign investors say one project that must be finished swiftly is the Cai Mep and Thi Vai deep-water ports and the related road infrastructure linking the ports with inland industrial zones.

Pincus says Vietnam has been busy spending money to build small, scattered seaports in the central region without realizing the urgent need for building a deep-water port to facilitate exports.

Without a deep-water port, local goods have to be trans-shipped at Hong Kong or Singapore, incurring unnecessary costs, he says.

Though a large portion of government investment and Official Development Assistance funds have gone towards infrastructure

development, the country’s infrastructure is not improving as fast as it should be because of red tape and unethical management of public works, he says.

Curbing investment, especially speculative real estate investment, is another way to curb inflation, Pincus says.

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