Wordcount: 1650

Newsletter

High-speed rail system refers to trains that travel at a high distance and at high speed, and it
could contribute enormously to the economy through enhancing supply chain and transportation
efficiency, which in turn lifting competitiveness in the global market and widening market access
(Majo 2023). Vietnam is currently planning on the first high-speed rail road North-South from
Hanoi to Ho Chi Minh City and through 20 cities and provinces (Duy 2024). The project aims to
complete the investment by 2025, of up to $72.02 billion, equivalent to 17% of GDP, and will
construct before 2030 and complete before 2045 (Ha 2024). Besides, the Ministry of Planning
and Investment aims to build two high-speed railways linking Hanoi to China before 2030
(Reuters 2024).

In developed countries, noticeably like China or Japan in Asia or France in Europe, the
development of high-speed rail systems are robust and the governments have continuously spent
budget to maintain and expand them, high-speed rail is also considered as economic power
(Nunno 2018; Jones 2022). Taking China for example, the country has the largest high-speed rail
system in the world and has spent over $1 trillion since 2009 for its railway system (Li 2023). In
return, the rate of return of high-speed railway regarding economic benefits as of 2015 was 8%,
higher than China’s opportunity cost capital and most other countries (Li 2019). In case of
Vietnam, the North-South high-speed railway project is positively forecasted to contribute to
GDP growth by 1% overall (Vietnamnet 2024).

However, for developing countries like Vietnam, spending and investment for high-speed rail
systems should be kept within the proposed budget that is carefully planned, instead of
increasing. In the rest of the newsletter, the writer will present the reasons for the opposition.

Economic benefits?
It is clear that the high-speed rail system would bring economic benefits as mentioned above and
also improve mobility to major cities and neighboring countries, reduce congestion and boost
tourism as well as tourism (Li 2019). However, the construction cost appears as the major
obstacle for developing countries like Vietnam. Indeed, the first high-speed rail project
connecting North-South needs more than $72 billion, and with that amount, Vietnam might have
to seek for investment and assistance from international organizations and foreign investment,
while still keeping it in careful consideration to avoid over-reliance on debts (Vietnamnet 2023).
That does not yet mention the annual cost of maintenance, which is also expensive as expected.
Besides, while it is proved that high-speed rail produces less carbon emission and is promoted as
eco-friendly development (Shen et al. 2023), however, another study published by the IEA stated
that only building a high-speed rail system does not totally mean reducing greenhouse gas
emission (Turner 2020).
 Figure 1: High-speed railway is proven to produce less carbon emissions and more energy
efficiency (US HSR n.d.)

To ensure environmental benefits, the construction must be energy efficient as well, and the train
must use clean energy while the services have to operate in full capacity to serve passengers who
turn from cars, motorbikes, and airplanes to high-speed trains (Turner 2020). Therefore, to
conclude and confirm that high-speed rail system would be a more eco-friendly transport mode
to call for more spending, there should be convincing data showing environmental friendly
benefits would outweigh the construction consequences, as well as the plan to ensure energy-
efficient construction and to persuade people to change from their traditional transportation
methods to high-speed rails.

Environmental benefits?
Moreover, high-speed rail development projects would definitely create more employment
opportunities, nonetheless, these labor is required to have advanced skills and specialization.
Indeed, 80% of domestic labor can satisfy the demand of the workforce, 20% are foreign
workers with professional knowledge about high-speed railways (Diep 2024), but that 80% of
domestic labor might be mostly those with high degrees and qualifications, and fewer in other
segments. Additionally, when developing a high-speed rail system hence attracting more
investment, most of it would be spent in urban areas and major cities, which is the common
allocation of new investment, then would result in deeper income differentiation and urban-rural
gap (Zhong et al. 2022).

Above are the arguments against the points given from the favoring side. Next the newsletter
discusses the potential outcomes if the government increases spending on high-speed rail system.
Firstly, the most apparent scenario is that Vietnam will face the opportunity cost since a large
amount of money has been allocated to high-speed rail system instead of other critical categories
like health, education, other infrastructure or social welfare programs that the government also
want to focus on and resolve their major problems (Mai 2023). Moreover, when the government
increases spending (overspend) on infrastructure like high-speed rail system, it could rein in
private investment due to scarce resources of labor, capital and materials (Hur et al. 2010), which
in turn has the reverse negative effect on domestic business expansion and economic activities,
that is known as the crowding out effect. That finding is proven through Unsal (2020) study of
17 OECD member countries during 1995-2017 period. Lastly, the effectiveness of increasing
spending depends on how well the budget is allocated and spent, meaning the efficiency of
resource allocation. Thus, there is no convincing argument when just stating increased spending
on high-speed rail system without analysis of resource allocation.

In conclusion, there are opposite arguments regarding economic and environmental benefits of
high-speed rail system. Those favoring ideas are only work given additional steps and procedures
to ensure followed, for example the construction and energy used to build the high-speed rail
should be green and energy efficient, while extra spending should go well with careful planning
of other sectors of economy , especially private investment to complement each other to avoid
crowding out effect. Moreover, when potential investment from foreign investors and
international organizations come, the government also should take the urban-rural gap into
consideration thoroughly to not widen the gap and create more inequalities. Finally, given the
current situation of the Vietnam economy, the writer is against the idea of increasing the
spending on this segment, while favoring keeping the initial budget for this infrastructure project.

Technical companion document

When the government increases spending, even in infrastructure like high-speed rail system,
more than the proposed budget set for this project, firstly it will compete with the resources of
capital, labor and materials of other private investment since they could not be used
simultaneously and lead to the crowding out effect (Furceri and Sousa 2011). Figure 2 illustrates
the market of loanable funds, showing when the government spent more on a specific project,
they might borrow more to finance the expenditure, then take more of the supply of the market,
represented as the shift to the left of the S curve. It will limit the economic growth since now the
private sector has to curtail economic activities in response to government actions, while private
sector investment fuels economic growth thanks to business expansions, more job opportunities
and innovation. As a result, it leads to the lower multiplier effect of initial government spending
(Millsap 2021), meaning the outcome benefits of the economy are not assured as 1% GDP
growth anymore as mentioned in the newsletter.

Figure 2: Illustration of crowding out effect in market and loanable funds diagram

Moreover, when increasing spending, even if the government uses the country’s budget or
financial assistance from international organizations, they will ultimately need added revenue to
pay back them, hence it is likely that they will raise taxes (Millsap 2021). The new equilibrium
point B indicates higher interest rate and together with increased taxes, it will reduce individuals’
income, dampen consumption and borrowing demand, while increasing the savings (Gale and
Samwick 2014). Thus, it hinders economic activities of individuals and the crowding out effect
not only affects private investment but also private consumption. Indeed, these behaviors of
consumers are reflected in the Rational Expectations Theory in which households adjust their
consumption, saving and investment based on forecast and understanding of available
information including past experiences and current situations together with government policies
(Frommel 2017).
 Figure 3: Rational expectations theory

It also could be illustrated in the AD/AS diagram to clearly feature the effect of increasing
government spending on private sector and consumption. Figure 4 shows the common movement
of aggregate demand when government spending is increased. The AD curve will shift to the
right, and with increased government investment and spending, the economy approaches higher
capacity that lifts prices higher and also increases overall output.
 Figure 4: AD/AS model shows desired GDP when government spending increase

Then Figure 5 demonstrates the real situation when the government overspends on infrastructure
and creates crowding out effect. AD curve shifts to the right while AS curve also shifts to the left
because high interest rate and high tax has hindered the private investment sector. The new
equilibrium point B shows higher price level and lower GDP growth than initial expectation.

Figure 5: Illustration of crowding out effect in AD/AS diagram

In terms of Aggregate Expenditure (AE) model (Figure 6), initially the increase of government
spending shifts the AE curve upward, equilibrium point B suggests desired real GDP. However,
higher taxes and interest rates reduce income and consumption as well as private sector
investment, therefore, AE shifts downward, even could lower the initial AE, point C implies the
potential lower real GDP than initial when the crowding out effect happens severely.
 Figure 6: Illustration of crowding out effect in AE diagram

Additionally, despite the improving situation of inequality in the economy, the gap between
urban and suburban and rural areas still exists, especially in employment and income. The main
reasons for those are the differences in terms of education, information access and mobility
(Nguyen and Do 2020). Evidently, the unemployment rate in major cities like Ho Chi Minh city,
Hanoi and secondary cities are 1.6%, 0.7% and 1% respectively, whereas that of rural areas is
about 2.9% to 3.9% (Statista 2024). As discussed in the newsletter, the job created by the high-
speed rail system might benefit those with high skills and qualifications especially in urban
areas, or at least emigrated rural people. Also, if it attracts more foreign investments, it would
only focus on urban areas as well, and when significantly increasing the urban areas with less
concentration on rural ones with suitable policies, the gap and inequality might widen.
Figure 7: Employment status of Vietnam (Statista 2024)
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