Use of Cost Function Analyses for Inter-Governmental Educational Transfers in Vietnam
ByHoang-Phuong Nguyen
Maxwell School of Citizenship and Public Affairs, Syracuse University
(Revised Oct 2008)
Abstract:
No study has been conducted to address two major problems in Vietnam’s education finance system. First, the central government’s population-based formula for allocating educational transfers fails to incorporate inter-provincial efficiency and cost differentials effectively. Second, the government lacks a useful tool for estimating spending required to attain a performance standard. Using data for 2002 and 2005, the paper demonstrates how a cost-function estimation can be the reliable and valid solution to the above two problems by 1/ identifying multiple cost and efficiency factors influencing provinces’ expenditures on educationsuch as their student-body characteristics, provinces’ geographic structures, income-relatedefficiency variables, and by 2/ providing an estimation of the minimum spending for a performance goal using the previous regression results.
1. INTRODUCTION
Education is always one of the most important sectors in almost all countries. Vietnam is not an exception. General public education is of significant interest to policy makers and local people in the country. GVN (2005) represents a strong commitment to the achievement of Vietnam’s Millennium Development Goals (MDG) including Goal 2 on universal primary education. The government’sfirm commitment to general education can also be seen in the promulgation and implementation of the Education for All (EFA) Action Plan from 2003 to 2015(GVN, 2003).Despite the critical importance of public education on Vietnam’s public policy agenda, there has been little research into the educational sector of Vietnam.Particularly, no scholarly study has ever been conducted to address two major problemswith the country’s education finance system. First, the central government’s current budgeting norms for the transfer of educational funds to provinces are over-simplified and based primarily on population (Nguyen et al., 2001, 12). It is because there is “no fair research and formula-based method of educational fund distribution at the central level” (Nguyen et al., 2001, 12). The population-based norm does little to recognize several different cost and efficiency[1]factors for provinces to achievean “adequate” education.[2]For instance, a factor that is not fully accounted for in the norm is the proportion of ethnic minority students.Provinces with large numbers of these students need to pay higher teacher salaries to compensate for their more challenging teaching environment. The government’s failure to fully reflect efficiency and especially cost differentials in its distribution of transfers may lead to large inter-provincial discrepancies in access to adequate financial resources for public education, and thus violate the most basic equity standard of educational adequacy whereby children in every province receive an education that meets some minimum standard.[3]
Second, the government lacks a useful tool to estimate how much it may need to spend to obtain a desired performance standard. Currently, the government merely expressesits intention to increase educational funding with little attention to student performance. Specifically, the government expected to increase the ratio of education spending to Gross Domestic Product (GDP) from 3.7 percent in 2002 to 4.2 percent in 2015 in the 2003-2015 EFA Action Plan (GVN, 2003, xi) without a systematic link between this spending-effort target and achievement of performance goals.The lack of an analytical tool that can link expenditures with performance goals makes it difficult for the government to know the level of funding necessary for provinces to attain a certain level of student performance.
This paper’s principal contribution is to demonstrate how cost-function estimation can be the reliable and valid answer to thesetwo problems underlying Vietnam’s education finance system. Employing data for 2002 and 2005, the paper shows that the educational spending per pupil varies significantly depending on the composition of provinces’ student body, their geographic characteristics, degree of family involvement in children’s education, and various factors influencing provinces’ efficiency. This paper indicates that education cost analysis can not only take into account inter-provincial efficiency and cost differentials in a more thorough manner(via cost and efficiency indices), but can also be used to estimate total funding needed for provinces to achieve astudent-performance goalwith different levels of their efficiency.While it costs the government more to raise a desired level of performance, the total spending, all else being equal, can be reduced with provinces becoming more efficient in their operations.
The paper proceeds as follows. The second section presents a brief overview of Vietnam’s general public education and its financing mechanism. This section is then followed by detailed development of a conceptual framework for the cost-function estimation. Empirical strategy is developedin the fourth section. Next, I will describe data and measures used in the estimation model. Discussions of the regression results are presented in the sixth section. This section also exhibits estimation procedures and results of educational expenditures needed for the government of Vietnam to attain a desired level of student performance under different assumptions on provincial efficiency. Section seven concludes with suggestions for future research.
2. EDUCATION SECTOR AND ITS FINANCING
2.1 Public provision of education in Vietnam
This section provides background on the current system of general public education (grades 1-12) in Vietnam.[4] Public education in Vietnam is divided into three major levels: elementary (1-5), lower secondary (6-9) and upper secondary (10-12). While public schools are totally funded by the government, non-public schools fall into three types: semi-public, people-funded, and private. Semi-public schools that are still owned and managed by public authorities use existing classrooms and facilities, but self-finance primarily from parental contributions for most of their operating expenditures such as salaries for newly-hired teachers and increasing salaries for experienced teachers (Nguyen, 2004, 437). People-funded schools are owned, managed and financed by non-governmental organizations; schools of the third type are privately funded (World Bank, 1996).
<FIGURE 1 HERE>
Figure 1 shows the downward trend in absolute enrollments starting in the academic year of 2002-2003. The decrease in total enrollments comes mostly from a decline in elementary students that is sufficiently dramatic to more than offset rises in lower secondary and upper secondary enrollments. The decline in enrollments is far from surprising given an aging population. According to World Bank (2008), the proportion of the population aged between 0 and 14 declined from 43.11 percent in 1975 to 28.79 in 2006. Figure 2 indicates that the primary enrollment in non-public educational institutions has represented less than 0.5 percent of the total primary students since the academic year of 2001-2002. While the share of non-public students increases to less than 3 percent at the lower-secondary level, it jumps up to 33 percent for the upper-secondary level. Non-public upper secondary students, however, still represent less than one percent of the total enrollment of all three levels. All in all, publicly provided education, which is the focus of this study, remains the dominant form of schooling in Vietnam.
< FIGURE 2 HERE>
2.2 Financing public education
The lion’s share of expenditures on public education comes from provincial governments. They spent from 97 to 99 percent of the total expenditures on public education in 2002 (Martinez-Vazquez, 2005). Their expenditures on public education are financed by tax revenue and intergovernmental transfers.
Tax revenue in general falls into three categories: taxes assigned 100 percent at the central level, taxes assigned 100 percent at the provincial level, and shared taxes between the central and provincial governments. A province’s taxrevenue is dependent heavily on the latter two types of tax levies.[5]Taxes shared between the central and provincial governments consist mostly of value-added taxes (VAT), personal and corporate income taxes, taxes on profit remittances, and excise taxes;[6] taxes assigned 100 percent at the sub-national government level include land and housing taxes, natural resources taxes, taxes on transfer of land ownership, and other user charges and fees. However, under the past and current State Budget Laws,[7] provinces in Vietnam have no autonomy over any of the above tax bases or rates imposed upon them. Therefore, provinces with small own-source revenues cannot raise the pre-determined tax rates or enlarge their tax bases when they need additional funds for education. The only way for these provinces to improve their tax levies is to enhance efficiency in collection. However efficient they are in tax collection, the total amount of tax levies are still severely limited by their narrow tax base.
Inter-provincial disparity in tax revenue is compensated by a system of intergovernmental transfers. The transfers in Vietnam come in two categories. The first type of transfers consists of conditional or targeted transfers. They are made for the implementation of nationally targeted programs in areas like poverty reduction, housing, and vaccination. The provinces also receive intergovernmental transfers to address the consequences of unexpected national disasters or adverse socio-economic event (Martinez-Vazquez and Gomez, 2005, 360). However, there are no targeted, or categorical, transfers for public education in Vietnam. The second type is unconditional “balancing” transfers intended togenerate greater horizontal fiscal equity by balancing between provinces’ own-source revenue and their expenditure needs in all sectors including education. A few provinces with sufficient own-source revenue do not receive balancing transfers.[8]According to Martinez-Vazquez (2005, 42), the transfers have created significant equalization but substantial disparities remain. In other words, differences in provincial structural endowments are too large to be equally compensated by the intergovernmental transfers.
What is of great interest is the central government’s current lack of a sophisticated enough formula to compute the differential costs of education across provinces. The central government now employs a very simple formula for educational aid distribution whereby the unit cost per pupil is based on total population per province (Nguyen et al., 2001). Despite special programs aimed at providing extra funding for mountainous and remote areas, the adoption of the unsophisticated distribution formula leaves high-cost and poor provinces with insufficient funds for education, all else being equal. The insufficient funding may be compounded at the provincial level. While targeted transfers are aimed at other programs than public education, balancing transfers that include public education aid can in fact be used for any municipal service. Although the current State Budget Law regulates that local governments will need to spend eighteen percent of their total budgets on education by 2005 and 20 percent in 2010, the lack of enforcement mechanisms makes full compliance with the regulation highly questionable (Martinez-Vazquez, 2005, 52). The lack of enforceability is highly likely to result in even less spending on education when fiscally poor provinces have to apportion their scarce resources between education and other public services.
3. CONCEPTUAL FRAMEWORK OF THE COST-FUNCTION APPROACH
The government of Vietnam has multiple choices to improve its education aid distribution formula. In developed countries like the United States, calculating the resources needed for schools and districts to achieve a particular student performance level involves one of the three major methodological approaches: the successful-school (or “evidence-based”) approach, the professional judgment approach, and the cost-function approach. Under the successful-school approach, policy makers identify a set of high-performing schools and base estimates of the cost of providing a high-quality education on the lowest level of per-pupil spending among them (Imazeki and Reschovsky, 2005). Adopting the professional judgment approach, a government can organize several teams of educators to identify components needed to provide an appropriate education. Costs are then assigned to each of the agreed components (Rubenstein and Picus, 2003, 66). The cost-function approach is chosen as the focus of this paper for three principal strengths. First, despite challenges to the legitimacy of the cost-function approach (Hanushek,2005, 2006; Rice, 1997), this methodology can exhibit reliability and key types of validity (Baker, 2006; Duncombe, 2006). That is why this methodology has been widely used for both developed countries, especially the United States,[9] and developing countries (Tsang, 1988, 1997). In fact, the cost-function approach used in this paper demonstrates a high degree of validity and reliability in all feasible tests.[10]Second, it can incorporate a quite comprehensive list of factors affecting provinces’ cost of obtaining a given education standard, thus improving the equity of adequacy. Third, it can be used to predict the total required spending for various performance goals under different assumptions about the efficiency of provinces. The second and third strengths of this approach are exactly what the government of Vietnam needs to address the two problems with its education finance system earlier identified.
The following conceptual framework for the cost-function approach is largely adapted from the traditional education cost studies. Let C be the total cost per pupil. Owing to inefficiencies and/or funding inadequacies, the unobserved cost is different from observed expenditures. Following standard practice (Downes and Pogue, 1994; Duncombe and Yinger, 1998, 2005, 2007a, 2007b; Reschovsky and Imazeki, 1998, 2001, 2003) with some modifications for Vietnam’s different circumstances,[11]I have assumed that cost depends in multiplicative ways on student performance (S), and other cost factors (N) such as student-body characteristics, and family involvement.
where and are elasticities to be estimated. Provinces’ operational expenditure per pupil (E) is a function of C and efficiency (e).
Efficiency refers to the degree of resources a production process consumes to yield a certain output given the current technology. The process is considered to be efficient if it uses the minimum resources. Inefficient production processes take more than minimum resources. Cost-function studies identify three important features of efficiency in education finance (Duncombe and Yinger, 2007; Nguyen and Yinger, 2008). First, higher spending on education does not necessarily imply inefficiency. Higher spending could be driven by factors outside the jurisdiction’s control. Provinces with a higher concentration of low-income or ethnic minority students tend to spend more to obtain the same level of performance. It also costs more for structurally disadvantaged provinces to attract good teachers. Second, efficiency depends on the analyst’s selection of outputs. While a province is considered inefficient from the perspective of certain outputs, it may be efficient if the analyst chooses other outputs. Efficiency is thus inevitably sensitive to, or dependent on, outputs in any production process with input sharing and multiple outputs. Public education is such a production process. Educational outputs, such as student performance on math, physics, English, and athletics, share the same inputs, namely teachers, classrooms, teaching aids and so forth. Beyond use of outmoded technologies, and other forms of waste, inefficient production of student performance in math and physics could simply be due to a province’s channeling more funding than other provinces into alternative educational outputs.
Third, unobserved efficiency can be modeled. Following other cost-function studies (Duncombe and Yinger, 2007; Nguyen and Yinger, 2008), I assume efficiencyto be a function of income-basedfactors influencing provincial officials’ behavior with regard to efficiency of production, variables indicating residents’ incentives to monitor the officials (M), and other efficiency-related variables (L).Specifically, the income-based factors consist of residents’ income (Y), balancing transfers per pupil (T), and provinces’ own-source revenue per pupil (R). All of the efficiency variables are represented in equation (3).
where , , , and are elasticities to be estimated, and f isthe “flypaper effect.”[12]Without f, both balancing transfers (T) and residents’ income (Y)are supposed to have the same income effect because they both create identical outward shifts of provinces’ budget line (Rosen, 2002, 502). However, research into intergovernmental transfers in developing countries has found empirical evidence of the “flypaper effect” phenomenon whereby transfers to local governments tend to lead to more local spending than an equivalent increase in local residents’ income (Lalvani, 2002; Melo, 2002). Put differently, as flies on flypaper, transfer money sticks where it hits.
A rise in provinces’ revenue may induce officials to spend on other areas of school activities that are not included in educational outputs measured by the researcher, thereby leading to higher inefficiency. Greater provincial inefficiency may also result from an increase in residents’ income that weakens their incentives to monitor provincial officials and boosts their demand for a broader set of educational objectives. While provincial officials’ response to increased revenue is expected to be more or less similar to that of educational officials in developed countries, it is of great interest to see whether local residents in Vietnam have any incentives to monitor provincial educational operations, and whether they in fact make any efforts to do so for two reasons. First, unlike other more democratic countries, local people in Vietnam have no electoral voice in the process of educational budgeting (Nguyen et al., 2001). Second, lack of tax autonomy for provincial governments and thus of a tax-price mechanism to reflect local residents’ willingness to pay for public services may compromise residents’ efforts to monitor provincial authorities.
It is, however, reasonable to hypothesize that a certain degree of the resident monitoring efforts are still in place. First, despite the lack of independent authority over tax rates and base, provincial governments in Vietnam can autonomously set some fees and charges.[13]Bird and Vaillancourt (1998, 13) argue that sub-national governments are accountable for their residents at the margin according to what they pay directly to the governments for local public services. Second, a certain type of fiscal illusion could be at work. As most taxes are collected by provincial tax authorities, residents may not be fully aware of which taxes provincial governments collect on behalf of the central government and which taxes they collect and retain for their own communities.