Public Investment: Another Perspective
By Do Manh Hong (*)
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| Public investment in developing traffic infrastructure needs supporting industries with regard to the supply of essential technology and materials |
Two factors are vital for translating economic potential into sustainable growth – high returns on investment and the efficacy with which public investment is used to fuel the growth of the private sector, especially supporting industries. Both of them are in turn dependent on efforts to reform State-owned enterprises.
In an economy still in the nascent stage of industrialization, growth hinges on public investment, which is used to provide public services and goods (such as traffic infrastructure and education) and excludes the Government’s stake in State-owned enterprises. While public investment is statistically included in national income accounting, this component is primarily aimed at improving the investment environment and luring investors, domestic and foreign alike.
Public investment efficiency is measured by the returns reaped and the efficacy with which such capital stokes, say, domestic private investment. The second yardstick rests on two pillars: positive changes in the business environment (including aspects like business costs and traffic conditions) and success in creating jobs and stimulating the private sector, including supporting industries.
Vietnam is among countries where domestic supporting industries are trapped in a vicious circle of appalling supply capacity and lackluster demand. At present, these industries are haunted by operating flaws, but still need to cater to assemblers, mainly foreign, in technology-intensive sectors such as car, machinery and household electrical appliance manufacturing.
Notably, sectors that public investment focuses on developing, such as traffic infrastructure and drainage systems, are also in need of supporting industries with regard to the supply of essential technology and materials such as steel, rubber, glass, paper, wood, fabric and so on, although the products in demand are generally not as sophisticated as those ordered by assemblers (compare, for example, engine cover and fences, products of practically the same supporting industry). This difference explains why public investment can help to nurture supporting industries, which can start with less technologically demanding products before embarking on more ambitious projects that require greater administrative capacity and technical know-how.
Of course, this process is feasible only if public investment is transparent, competitive and subject to stringent implementation and supervision procedures. In particular, public investment projects must be based on thorough research and comprehensive feedback from experts. There should also be a fair and transparent process to select the most competent and socially responsible suppliers of supporting industries.
Overhaul State-owned enterprises
Drastically reforming State-owned enterprises is critical for cultivating fair competition and fostering the development of private sectors in general and supporting industries in particular. It is necessary to reconsider and restore the proper role of these privileged firms.
Modern economic theory holds that State-owned enterprises are established to provide public goods and services that the private sector is not in a good position to supply optimally. Reforms should therefore compel State-owned enterprises to focus on public goods and services while allowing other businesses to thrive on the provision of private commodities. In effect, this means State-owned and private enterprises must be governed by different legal frameworks, with the former firms allowed to operate in public goods characterized by significant monopoly power.
If efforts to revamp State-owned enterprises are delayed, growth will be dramatically impeded. While public investment is crucial for helping Vietnam attain double-digit growth and catch up with regional powerhouses, so are reforms of State-owned enterprises, which should aim mainly to provide public goods. The supply of private commodities, meanwhile, should be the realm of private firms, and public investment a platform for stimulating the development of local supporting industries.
(*) Obirin University, Tokyo