Solutions to improve the efficiency of investment capital use, turning limitations into advantages for development

In economics, efficiency is the top factor for evaluation, and for investment, the ICOR coefficient is the measure of efficiency.

ICOR ( Incremental Capital - Output Ratio )

Investment capital efficiency (ICOR) is a comprehensive economic indicator reflecting how much additional investment capital is needed to increase 1 dong of gross domestic product (GDP). The ICOR varies depending on the socio-economic situation in different periods, depending on the investment structure and capital efficiency. If the ICOR is low, it shows that the investment is highly effective and vice versa.

Calculation formula: ICOR = (K _t – K _t-1 )/(Y _t – Y _t-1 )

In there:

ICOR – Investment capital efficiency;

K – Investment capital;

Y – Output achieved;

t – Is the reporting period

_t-1 – Is the period before the reporting period

Vietnam's capital efficiency index (ICOR) is high compared to other countries in the region and emerging industrial countries in the same period , the average ICOR in the period 2016-2019 was 6.14 ^[1] , the period 2011-2016 was 6.25 ^[2] - a figure too high compared to the ICOR index of East Asian countries and territories during the take-off period, such as Japan was 3.2 (1961-1970), South Korea was 3.2 (1981-1990), Taiwan (China) was 2.7 (1981-1990). Even compared to countries like Cambodia (3.21) and Laos (4.2), our ICOR coefficient is much higher ^[3] . This is a major limitation, showing that our investment capital efficiency is low.

Low efficiency of investment capital and high ICOR coefficient are considered as we are developing below potential. On the positive side, this is an advantage and opportunity for economic development, there are many conditions to improve the efficiency of investment capital, increase output with the same amount of investment capital (input). According to the recommendations of prestigious financial institutions such as the World Bank, Vietnam's ICOR at 3 is effective investment and the economy is developing in a sustainable direction.

To improve the efficiency of investment capital, we need to promote the synchronous implementation of solutions. In this article, we would like to present some basic solutions as follows:

- Publicize and make transparent information about state investment in general and each state investment project in particular.

- Further promote administrative reform, reduce administrative procedures, avoid causing trouble for businesses and harassing people.

- Actively fight against corruption, waste, prevent negative behavior and group interests.

- There is a coordination mechanism between relevant agencies in implementing macroeconomic policies, in monitoring and controlling capital flows.

- Improve investment management capacity, effectiveness and efficiency of monitoring and evaluating the effectiveness of state investment; Designate a focal agency to coordinate and take ultimate responsibility for inspecting, monitoring and evaluating the socio-economic effectiveness of investment projects in particular and state investment in general.

- Arrange and restructure state investment, increase investment in healthcare, vocational training, develop the financial system, develop the social security system; In the coming period, increase investment in developing services for agricultural production and consumption of agricultural products.

- Issue criteria for appraisal and selection of investment projects using state budget capital, criteria for assessing the socio-economic efficiency of investment projects; mechanisms for allocating state investment capital towards concentrated investment, resolutely not investing in a scattered manner, ensuring quality and efficiency, serving to promote or lead economic restructuring.

- Based on the issued criteria, review and re-evaluate all projects (in progress or in planning), classify projects in order of priority, and eliminate projects that no longer meet the set criteria. Review and evaluation are prioritized by industry and sector, first of all, transport infrastructure projects, prioritizing capital concentration for projects at traffic intersections of goods circulation in key economic zones, projects connecting key economic zones with other localities and economic zones.

- Supplement and amend the investment management decentralization mechanism in the direction that the Central Government decides on investment orientation and planning, and local authorities directly decide and implement specific investment projects.

- Normally, the ICOR of an economy tends to increase gradually due to the law of diminishing returns . To avoid this, it is necessary to constantly improve techniques to increase the efficiency of capital use.

( ^[1] , ^[2] According to General Statistics Office)

( ^[3] Promoting the development of science - technology and innovation - a strategic breakthrough in the new period. Associate Professor, Dr. Tran Quoc Toan - Member of the Central Theoretical Council. https://tapchicongsan.org.vn/ January 31, 2021)

Institute of Postgraduate Training