Effects of infrastructure projects on government revenue: The case of expressway projects in the Northern Midland and Mountainous area of Viet Nam

Yoshino, Naoyuki; Truong Thi Hoa Working Paper Effects of infrastructure projects on government revenue: The case of expressway projects in the Northern Midland and Mountainous area of Viet Nam ADBI Working Paper Series, No. 1171 Provided in Cooperation with: Asian Development Bank Institute (ADBI), Tokyo Suggested Citation: Yoshino, Naoyuki; Truong Thi Hoa (2020) : Effects of infrastructure projects on government revenue: The case of expressway projects in the Northern Midland and Mountainous area of Viet Nam, ADBI Working Paper Series, No. 1171, Asian Development Bank Institute (ADBI), Tokyo This Version is available at: https://hdl.handle.net/10419/238528 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/igo/ ADBI Working Paper Series EFFECTS OF INFRASTRUCTURE PROJECTS ON GOVERNMENT REVENUE: THE CASE OF EXPRESSWAY PROJECTS IN THE NORTHERN MIDLAND AND MOUNTAINOUS AREA OF VIET NAM Naoyuki Yoshino and Truong Thi Hoa No. 1171 August 2020 Asian Development Bank Institute The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. Some working papers may develop into other forms of publication. In this report, “$” refers to United States dollars. The Asian Development Bank refers to “Vietnam” as Viet Nam. Suggested citation: Yoshino, N. and T. Thi Hoa. 2020. Effects of Infrastructure Projects on Government Revenue: The Case of Expressway Projects in the Northern Midland and Mountainous Area of Viet Nam. ADBI Working Paper 1171. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/effects-infrastructure-projects-government-revenue-vietnam Please contact the authors for information about this paper. Email: [email protected], [email protected] Naoyuki Yoshino is Professor Emeritus of Keio University and former dean of the Asian Development Bank Institute (ADBI) in Tokyo. Truong Thi Hoa is a research associate at ADBI. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Working papers are subject to formal revision and correction before they are finalized and considered published. Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2020 Asian Development Bank Institute ADBI Working Paper 1171 Yoshino and Thi Hoa Abstract This paper examines the effects of infrastructure projects on economic performance by studying the changes in government revenue in the Northern Midland and Mountainous region of Viet Nam. More specifically, this paper investigates the effects of two expressway projects, namely (1) the Noi Bai–Lao Cai project and (2) the Ha Noi–Thai Nguyen project. In this study, we focus on the government revenue of the region, including personal income tax revenue, other government revenue from business activities, and total revenue, because they reflect the economic performance that the infrastructure investment creates. To investigate the impacts of infrastructure projects, we utilize the difference-in-difference (DID) method and compare the government revenue between the traversed regions and the non-traversed regions in two periods: (1) the construction phase and (2) the operation phase of the projects. The main estimated results show significant increases in the government revenue along the two expressways, highlighting an economic increase in the region after the completion of the expressway projects. Keywords: infrastructure, difference-in-difference analysis, tax revenues, Viet Nam JEL classification: H54, O11, O23, R11 ADBI Working Paper 1171 Yoshino and Thi Hoa Contents 1. INTRODUCTION ................................................................................................... 1 1.1 Overview of the Vietnamese Northern Midland and Mountainous Region ...... 1 1.2 Overview of the Highway Projects ............................................................... 3 2. DIFFERENCE-IN-DIFFERENCE (DID) METHOD ANALYSIS .................................. 4 3. DATA DESCRIPTION ............................................................................................ 7 4. EMPIRICAL RESULTS......................................................................................... 10 4.1 Effects of Infrastructure Projects on Income Tax Revenue .......................... 10 4.2 Effects of Expressway Projects on Revenue from Business Activities ......... 11 4.3 Effects on the Total Domestic Revenue ..................................................... 12 5. CONCLUSION ..................................................................................................... 13 REFERENCES ............................................................................................................... 15 ADBI Working Paper 1171 Yoshino and Thi Hoa 1 1. INTRODUCTION Infrastructure investment is undeniably one of the key policies for economic development and poverty reduction. High-quality infrastructure projects in transportation, telecommunication, power, or water supply exert favorable impacts on all players in economies, from firms and citizens to the government. Effective infrastructure reduces distribution costs, opens up more economic opportunities, encourages innovation, and boosts the performance of businesses. In addition, it plays a significant role in poverty reduction by creating more new jobs and giving the poor access to better healthcare and education (ADB 2017). Moreover, we need to bear in mind that infrastructure alone cannot play a significant role in poverty reduction. There will be a greater effect of infrastructure investment if the government and private sectors provide much more funds, for example in the form of loans, to support small and medium-sized enterprises (SMEs) in the region. Investing in infrastructure is costly. ADB (2017) estimates that Asia alone needs $26 trillion for infrastructure investment from 2006 to 2030. Despite the increasing contribution of the private sector, the main funding for investment still comes from governments. This circumstance raises a concern among governments and the public that investing in infrastructure would cause a heavy burden on government budgets. Especially after COVID-19, government deficit will rise, therefore private investment into infrastructure is very important. As Yoshino and Abidhadjaev (2017b) proved in the case of a high-speed railway project in Japan and Yoshino and Pontines (2018) showed in the case of a road tollway in the Philippines, infrastructure projects increase tax revenue and hence ease the finance burden of the government. This study revisits the issue by focusing on the effects of two expressway projects on the revenue of provincial governments in the Vietnamese Northern Midland and Mountainous area, the most underdeveloped region of the nation. Although there is an expectation that these two projects will play crucial roles in economic development, there is a lack of studies that have quantified the impacts. Therefore, we aim to estimate the changes in government revenue that the projects will cause by applying the difference-in-difference (DID) method and comparing government revenue between traversed and non-traversed regions. 1.1 Overview of the Vietnamese Northern Midland and Mountainous Region Since 2000, based on socioeconomic characteristics, Viet Nam has been divided into six regions, namely the Northern Midland and Mountainous region, Red River Delta region, Central Coast region, Central Highland region, South East region, and Mekong Delta region. The focus of this study is the Northern Midland and Mountainous region,1 which is the poorest region in the country. Figures 1 and 2 below show the income per month and poverty rates of the region compared with other regions from 1998 to 2018. The General Statistics Office of Viet Nam (GSO) reports data on income and poverty rates based on data from a household survey, which it conducts every 2 years in Viet Nam. The figures show that, over the past 20 years, the Northern Midland and Mountainous area has remained the poorest region of Viet Nam in terms of both income and poverty rates. In 2018, the average income per month in the region stood at around VND2.5 million, less than half of that in the Southeast region, the richest one in the country. At 1 The region consists of 14 provinces: Bac Giang, Bac Kan, Cao Bang, Dien Bien, Ha Giang, Hoa Binh, Lai Chau, Lang Son, Lao Cai, Phu Tho, Son La, Thai Nguyen, Tuyen Quang, Yen Bai. ADBI Working Paper 1171 Yoshino and Thi Hoa 2 the same time, the region has stood out with the highest poverty rates over the last 20 years. Figure 1: Income per Month in Vietnamese Regions (1999–2018) (VND ’000) Data source: The General Statistics of Viet Nam (GSO). Figure 2: Poverty Rates in Vietnamese Regions (1998–2016) (Percentage) Data source: The General Statistics Office of Viet Nam (GSO). According to Pimhidzai (2018), in Viet Nam, the poor regions are concentrated in remote mountainous areas, including the Northern Mountainous area and the Central Highlands. One of the main reasons for this circumstance is the insufficiency of access to economic opportunities or education due to the low quality of the infrastructure system in the region (ADB 2014). Therefore, constructing a high-quality infrastructure project in the Northern Midland and Mountainous region of Viet Nam is particularly important for boosting economic performance as well as reducing poverty. ADBI Working Paper 1171 Yoshino and Thi Hoa 3 The infrastructure improvement should include not only constructing more quality transportation projects but also projects in other sectors, such as enhancing access to the Internet. For instance, the Internet would give students in the area better access to education through online or mobile learning. In 2008, the Vietnamese government have approved a master plan for an expressway system from the north to the south of the country as one of the key focuses of infrastructure improvement in the country. Among the approved projects, there are several projects in the Northern Midland and Mountainous area, including the Noi Bai–Lao Cai, Ha Noi–Thai Nguyen, and Bac Giang– Lang Son projects (Japan International Cooperation Agency (JICA) and Viet Nam Ministry of Transport 2010). There is an expectation that these projects will play a crucial role in improving the economic performance in the region. This study investigates the effects of two expressway infrastructure projects that ended and opened to traffic in 2014: the Noi Bai–Lao Cai and Ha Noi–Thai Nguyen projects. 1.2 Overview of the Highway Projects The Noi Bai–Lao Cai highway has a length of 265 kilometers, starting in Noi Bai, a suburban area of Ha Noi, and ending at a busy gateway to the People’s Republic of China (PRC) in Lao Cai. Most of the funding came from a loan from the Asian Development Bank (ADB), and the highway traverses five provinces/cities, Ha Noi, Vinh Phuc, Phu Tho, Yen Bai, and Lao Cai. This project is one section of the Greater Mekong Subregion Economic Corridor, which helps to connect the PRC’s Yunnan province with Ha Noi and Hai Phong in Viet Nam. The construction process lasted from 2008 to 2014, and the expressway opened to traffic in 2014. Another important highway project in the area also opened to traffic in 2014: the Ha Noi–Thai Nguyen project. With a length of 65 kilometers, this project connects Thai Nguyen, a new production hub of Viet Nam, to Ha Noi. With finance from an ODA loan from the Japan International Cooperation Agency (JICA) and from the Vietnamese government, the construction of the Ha Noi–Thai Nguyen expressway began in 2009 and ended in 2014. There is an expectation that these two expressways will play a significant role in the economic development of not only the Northern Mountainous area but also the whole of northern Viet Nam, because they will not only improve the infrastructure quality of the region but also help to connect the PRC to Ha Noi and Hai Phong, two important cities of Viet Nam. This paper concentrates on the impacts of these two expressway projects on the Northern Midland and Mountainous Area of Viet Nam for several reasons. First, compared with other regions, this region is the most undeveloped one in Viet Nam, and there is a lack of access to economic opportunities due to the inadequate quality of the infrastructure. Therefore, the new high-quality highway projects expect to play a bigger role in promoting the economy of this region. Second, until 2018, only two highway projects operated in five provinces. The remaining 10 provinces still suffered from low-quality old roads. This circumstance creates a context in which to investigate the effects of infrastructure projects by comparing the performance between affected provinces and non-affected provinces. ADBI Working Paper 1171 Yoshino and Thi Hoa 4 The total sample of data covers 14 provinces from 2009 to 2018. We divide the region into two groups: the affected group, which benefits from the projects, and the nonaffected group, which does not benefit from the projects. The first group consists of four provinces: Phu Tho, Yen Bai, Lao Cai (Noi Bai–Lao Cai highway), and Thai Nguyen (Ha Noi–Thai Nguyen highway). Although both projects have a starting point in Ha Noi, we did not include Ha Noi in the study because it belongs to the Red River Delta region and is very different from the region in terms of socioeconomic factors. We also did not include Vinh Phuc, a province through which the Noi Bai–Lao Cai expressway passes, because this province belongs to the Red River Delta region and hence does not belong to the region of interest. The control group consists of ten provinces: Bac Giang, Bac Kan, Cao Bang, Dien Bien, Ha Giang, Hoa Binh, Lai Chau, Lang Son, Son La, and Tuyen Quang. We divided the data into two periods, the construction phase (2009–2014) and the operation phase (2015–2018). By separating the data into two periods, we could estimate the change in provincial governments’ revenue between the construction and the operation phase of the highway projects using the difference-in-difference method. The estimation results show that the infrastructure projects have favorable impacts on government revenue. After controlling for other key determinants of revenue performance, including the lag of GDP, share of the agricultural sector, and corruption restriction index, we observed significant increases in all three types of revenue, namely income tax revenue, revenue from business activities, and total domestic revenue, in the affected group since the completion of the expressways. These findings suggest a positive impact of expressway projects on economic activities in the affected provinces. The structure of the paper is as follows. The next section, section 2, details how we conducted the empirical analysis. Section 3 provides more information on the utilized data. Section 4 presents the empirical results, and the last section concludes the paper. 2. DIFFERENCE-IN-DIFFERENCE (DID) METHOD ANALYSIS One of the main purposes of investing in infrastructure projects is to encourage business activities, employment, and hence economic growth in the region. However, rather than looking at the effects on those variables, this study focuses on the effects of infrastructure projects on three types of government revenue, because the expansion of economic activities will reflect in increases in government revenues. New employment resulting from infrastructure development will result in higher incomes and higher income tax revenue. At the same time, the infrastructure could create more business opportunities, such as the opening of restaurants or factories, and thus raise the business-related tax revenue. Lastly, we also considered the total domestic revenue of provinces, which is the sum of not only personal income tax and revenue from business activities but also agricultural land use tax, revenue from fee and charges, and so on. Among the 14 provinces in the region, four affected provinces benefit more from the operation of the expressways, which encourage business activities, create employment, and expand economic growth, hence increasing the government revenue of those provinces. Therefore, in this study, we expected to see a significant increase in the government revenues of the affected provinces in the operation phase compared with those of non-affected provinces and in the construction phase. We applied the difference-in-difference (DID) method, which researchers have often used to study the effects of policy change, for empirical analysis purposes. The basic idea of this method is that, when a government introduces a policy change, there are two ADBI Working Paper 1171 Yoshino and Thi Hoa 11 raise the income of the people who live in those provinces, and therefore increase the income tax revenue of the provinces. As expected, the results of the lag of GDP and GDP per capita are positive and significant at the 1% level. These results confirm that the size of the economy and income level of citizens are important factors that determine the personal income tax that the local government collects. However, the positive coefficients for agriculture are quite unexpected. Table 3: Effects on Income Tax Revenue Dependent Variable Independent Variable (1) (2) (3) (4) Income Tax Income Tax Income Tax per Capita Income Tax per Capita 𝐷𝐷𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑖𝑖𝑎𝑎𝑎𝑎*𝐷𝐷2015−2018 29.71** 35.59*** 0.0365** 0.0372*** (0.038) (0.006) (0.029) (0.006) GDPi,t 0.0102*** 0.0123*** (0.000) (0.000) GDP per capitai,t 0.00884*** 0.0115*** (0.000) (0.000) Agriculture sharei,t 659.1** 0.595* (0.030) (0.099) Corruption restrictioni,t 2.772 0.00388 (0.233) (0.157) Constant –106.5*** –313.7*** –0.106*** –0.320** (0.000) (0.004) (0.000) (0.110) Within R_squared 0.771 0.796 0.705 0.735 Observations 115 115 115 115 Number of groups 14 14 14 14 Note: p-value in parentheses. *** p<0.01, ** p<0.05, * p<0.1. 4.2 Effects of Expressway Projects on Revenue from Business Activities Table 4 shows the regression results on government revenue from business activities. The estimated coefficients of the DID variable are positive for both total revenue and revenue per capita but only significant in the case of total revenue. The results presented in column 2 in Table 4 indicate that, on average, the operation of infrastructure projects adds around VND232.5 billion to each province that benefits from the infrastructure projects. This is a considerable increase in government revenue, considering that the mean of the total revenue from business activities in one year for provinces in the whole region is around VND828 billion and the figures for provinces in the treatment and control groups are approximately VND1,406 billion and VND610 billion.3 This finding provides evidence that, once the expressways are open to traffic, they bring more access to economic opportunities to the private sector, especially businesses, in the area. In return, local governments benefit from the business growth because they can collect more taxes. 3 More details on government revenue appear in Table 1: Descriptive Statistics. ADBI Working Paper 1171 Yoshino and Thi Hoa 12 Similar to the results for income tax revenue, the lags of GDP and GDP per capita are significant factors that are positively associated with revenue from business activities. The estimated coefficients of the share of the agricultural sector are significantly negative, as expected. This result favors the view of Gupta (2007) that a larger share of agriculture is negatively associated with the revenue performance of developing countries’ governments because it is more difficult to tax businesses in the agricultural sector than in the manufacturing and service sectors. Table 4 also presents unexpected results for the corruption restriction variable. The significantly negative coefficients of this variable suggest that governments that perform better in terms of restricting corruption actually collect less revenue from business activities. This finding supports the “grease of the wheels” hypothesis about the effects of corruption on business activities in the region. According to this hypothesis, in economies with administrative inefficiency, enterprises might benefit from bribery because it helps them to overcome administrative delays and speed up transactions (Méon and Weill 2010). Table 4: Effects on Revenue from Business Activities Dependent Variable Independent Variable (1) (2) (3) (4) Business Revenue Business Revenue Business Revenue per Capita Business Revenue per Capita 𝐷𝐷𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑖𝑖𝑎𝑎𝑎𝑎*𝐷𝐷2015−2018 264.7** 232.5* 0.107 0.0977 (0.035) (0.081) (0.149) (0.368) GDPi,t 0.0512*** 0.0440*** (0.000) (0.000) GDP per capitai,t 0.0615*** 0.0402*** (0.000) (0.000) Agriculture sharei,t –2,171** –4.399*** (0.039) (0.003) Corruption restrictioni,t –37.12** –0.0588** (0.032) (0.014) Constant –44.74 795.0*** –0.235*** 1.538*** (0.338) (0.004) (0.001) (0.001) Within R_squared 0.797 0.815 0.724 0.781 Observations 114 114 114 114 Number of groups 14 14 14 14 Note: p-value in parentheses. *** p<0.01, ** p<0.05, * p<0.1. 4.3 Effects on the Total Domestic Revenue After running tests to estimate the effects on income tax revenue and revenue from business activities, we ran further tests to estimate the effects on the total domestic revenue (see Table 1). The results of the 𝐷𝐷𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑖𝑖𝑎𝑎𝑎𝑎*𝐷𝐷2015−2018 variable are positive and significant at the 1% level in all the tests. More specifically, column 2, Table 3, shows that, after controlling for the lag of GDP, agriculture share, and corruption restriction index, the total revenue rises by about VND479.7 billion compared with the unaffected provinces. Given that the mean of the total domestic revenue of provinces in the region is only approximately VND1,588 billion, it is apparent that the operation of new expressways exerts substantial effects on the economic activities and financial performance of the local government of the affected provinces. In addition, the domestic ADBI Working Paper 1171 Yoshino and Thi Hoa 13 revenue per capita increases considerably by around VND0.442 million. One point to note here is that the majority of the increase in the total domestic revenue comes from the increase in revenue that local governments collect from business activities. The increase in business revenue that Table 4 shows is around VND232.5 billion, making up almost half of the total increase. The estimated coefficients of the lag of GDP and GDP per capita remain significantly positive. The size of the economy and income level of provinces are crucial determinants of the total domestic revenue that provincial governments generate in the region. The results for the share of agriculture are not significant in the case of the total domestic revenue but are significantly negative in the case of the domestic revenue per capita. Table 5: Effects on Total Domestic Revenue Dependent Variable Independent Variable (1) (2) (3) (4) Domestic Revenue Domestic Revenue Domestic Revenue per Capita Domestic Revenue per Capita 𝐷𝐷𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑖𝑖𝑎𝑎𝑎𝑎*𝐷𝐷2015−2018 490.1*** 479.7** 0.452*** 0.442** (0.007) (0.012) (0.008) (0.021) GDPi,t 0.128*** 0.124*** (0.000) (0.000) GDP per capitai,t 0.133*** 0.118*** (0.000) (0.000) Agriculture sharei,t –1,203 –3.248* (0.335) (0.086) Corruption restrictioni,t –4.466 –0.0394* (0.764) (0.086) Constant –606.4*** –231.7 –0.824*** 0.461 (0.000) (0.508) (0.000) (0.341) Within R_squared 0.936 0.937 0.895 0.902 Observations 115 115 115 115 Number of groups 14 14 14 14 Note: p-value in parentheses. *** p<0.01, ** p<0.05, * p<0.1. 5. CONCLUSION Aiming to reveal the impacts of infrastructure projects on economic performance, this research studied the case of two expressway projects (Noi Bai–Lao Cai and Ha Noi– Thai Nguyen) in the Northern Midland and Mountainous area of Viet Nam, the least developed region in the country, and produced several notable findings. The estimation results favor the argument of many policy makers who see infrastructure development as a key policy that would facilitate better access to economic opportunities and education and thus better economic performance in the region. Even after controlling for several significant determinants of government revenue, the analysis suggested that local governments of provinces that belong to the treated group could collect more government revenue after the expressways open to traffic. The increase in revenue could be observed in not only personal income tax and revenue from business activities but also total domestic revenue. These findings suggest the role of infrastructure projects in economic activities because better performance of an economy would result in higher government revenue, especially tax revenue. For instance, the rise in personal income ADBI Working Paper 1171 Yoshino and Thi Hoa 14 tax suggests higher income of citizens because of the creation of more employment opportunities. The expressways also give more chances to expand the business of enterprises and increase the business-related taxes that the government collects. ADBI Working Paper 1171 Yoshino and Thi Hoa 15 REFERENCES Asian Development Bank (ADB). 2014. Proposed Loans for Additional Financing Socialist Republic of Viet Nam: Greater Mekong Subregion Kunming–Hai Phong Transport Corridor—Noi Bai–Lao Cai Highway Project. Manila. ———. 2017. “Meeting Asia’s Infrastructure Needs.” doi: 10.22617/FLS168388-2. Manila. Bird, R. M., J. Martinez-Vazquez, and B. 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