ECONOMETRIC MODEL OF GROWTH LONG TERM GROWTH VIEW, CASE STUDY IN VIET NAM

ECONOMETRIC MODEL OF GROWTH - LONG-TERM GROWTH VIEW, CASE STUDY IN VIET NAM Quyet Pham Dang Kinh Bac University, Bac Ninh City, Vietnam Abstract There have been many studies in Vietnam and abroad to identify the factors influencing economic growth with parametric or non-parametric approaches This study uses the Cobb-Douglas production function with the assumption of the exponents of labor and capital inputs unchanged and includes dummy variables explaining Vietnam's economic development stages from 1970 to 2020 to answer the question: what determines Vietnam's long-term growth rate The paper measures the contribution of capital stock, labor, and technological progress to the growth of the economy and contribution of increasing capital intensity and increasing total factor productivity (TFP) to increasing labor productivity The major findings are: the most important source of economic growth is capital accumulation, and although the TFP growth rate has gradually increased, capital intensity is still the main factor contributing to the increase in labor productivity, but the use of capital is not effective The main driver of economic growth is increasing labor productivity The Cobb-Douglas Logarithmic function regression statistics revealed some interesting information and policy implications related to the Vietnam's economy as the market-oriented institutions have had a positive impact on economic growth, bringing about impressive progress in growth, but the growth efficiency is still low Among the transition directions, the institutional transformation orientation is the most important This is considered an important decisive factor of the national competitiveness so that the country's economy will move from an efficiency-driven stage to an innovation-driven economy Key words: Econometric model of growth, production function, economic growth, capital productivity, labor productivity, total factor productivity TFP Problem A country's Gross Domestic Product (GDP) provides a measure of the monetary value of the goods and services that are produced in a particular year This is an important statistics that tells whether an economy is growing or declining Providing quantitative GDP data helps the Government to make decisions such as stimulating the economy by injecting money in the case of an unimproved economy that needs such stimulus packages In case the economy is heating up, the Government can also act to prevent this from becoming too overheated Businesses can also use GDP data as a guide to decide how to best expand or shrink their production and other business activities And investors also monitor GDP figures because these provide a framework for making investment decisions Economic growth is the increase in the market value of the goods and services that an economy produces over time It is measured as the percentage rate change in the real gross domestic product (GDP) GDP growth is the goal to achieve improved quality of life Gross domestic product per capita is an important indicator of the economic development level and living standards of the people There is an important difference between the growth variation of an economic cycle (cyclical variation) and long-term growth (long-term trends) The economic cycle, also known as the business cycle, is the variation of real GDP in a three-phase order of recession, recovery and prosperity respectively There is also a view that the recovery phase is non-essential, so the business cycle consists of only two main phases: recession and prosperity (or expansion) Long-run growth is defined as the sustained rise in the quantity of goods and services that an economy produces Economic growth depends on two processes: accumulating assets (such as capital, labor, and land) and investing in these assets more productively Savings and investment are central, but investment must be effective to boost growth Government policy, institutions, political and economic stability, geographic characteristics, natural resources, health and educational qualifications all play a certain role in influencing growth of the economy The question arises: what determines the longterm growth rate of an economy? The economy achieves growth from two sources: first, by increasing the amount of its inputs as capital, labor and raw materials and second, by improving the efficient use of capital, labor and the materials By improving productivity, a country can achieve economic growth by converting the same amount of inputs into higher levels of total output Productivity (including total factor productivity TFP) increases can also stem from a higher quality of goods and services without increasing their costs respectively This study uses the Cobb-Douglas production function with the assumption of the exponents of labor and capital unchanged and introduces dummy variables explaining Vietnam's economic development stages from 1970 to 2020 to identify factors influencing Vietnam's long-term economic growth The conceptual origin of an aggregate production function is clearly identified in the work of Paul H Douglas et al There should be a careful distinction between concepts of an aggregate production function and a Cobb-Douglas logarithmic or linear function that are more frequently quoted from Douglas's contribution The conceptual framework in the study of economic growth was further developed by Kendrick, Solow, and other pioneers (Dale 1988) Production function and economic growth Until recently the studies on sources of economic growth were based on the view of an aggregate production function This concept is one of the master simplifications that make it possible to summarize a mess of details into a simple aggregate framework It is also the concept that seems relevant to the interpretation of figures of output, input, and productivity compiled in the national production accounts But the concept of an aggregate production function is ambiguous, requiring very strict assumptions about the production model at the stages of each sector of the economy Intuitively speaking, the technologies for each industry must contain a simulation of the aggregate production function At the aggregate level, output is represented by the amount of value added, expressed as a function of capital and labor inputs and productivity levels This would be helpful to explain basic assumptions about the aggregate production function and its implications In a production process, labor, capital and intermediate inputs are combined to produce one or more outputs For any kind of certain assets, there is an inflow of capital that flows into production from the accumulated stock of past investments This flow of capital into production is known as the capital service of the asset and is an appropriate measure of capital input for production and productivity analysis Since capital service flows are often not directly observable, they are approximated by assuming that the capital service flows are proportional to the stock of assets after each transformation converted into consumption standard efficiency units The reserves of capital so calculated are called the productive stock of a given type of asset Consequently, building the capital stock produced for each asset type is the first creation step towards measuring the amount of capital services Do this using the Perpetual Inventory Method (PIM) The general formula for calculating the capital stock for a given year is: 𝐾(𝑡) = (1 − 𝛿 )𝐾(𝑡 − 1) + 𝐼(𝑡) (1) Where, K(t) is the total amount of capital in year t, I(t) is investment, also known as capital formation in year t, δ is the depreciation coefficient Labor is also the most important input to production processes From a production analysis perspective, labor input is most appropriately measured as the total hours worked Because a labor's contribution to production includes raw labor (or physical presence) and the transformation from human capital of labor - an hour worked by one person is not necessarily generating the same amount of labor input as an hour worked by someone else Labor input can also be measured by the number of jobs This measurement is simpler, but it does not reflect changes in average hours worked per worker nor changes in people doing multiple jobs and the roles of selfemployed workers (or labor quality) (OECD 2001) Let L be the total supply of labor In addition, there are other factors that determine growth, such as technology including science, engineering, management techniques; natural resources - land, oil, minerals, environmental quality; institutions - property rights, execution contracts (legal system), patent and copyright law; and culture - social capital, entrepreneurship, work ethic and capitalism spirit (Max Weber) Determining the factors affecting economic growth has long been done by a large number of domestic and foreign researchers Cobb and Douglas, two American mathematicians and economists, applied a production function growth model to study the effect of labor and capital factors on gross industrial products manufacturing in America In addition to the contribution of each factor of labor and capital, we also see a new value created by an intangible part This intangible part is the aggregate effect of inputs and is called A Economists use the abstract concept of the aggregate production function: 𝑌 = 𝐹(𝐾, 𝐿, 𝐴) (2) The Cobb-Douglas production function is presented in an exponential form: 𝑌 = 𝐴𝐾 ∝ 𝐿𝛽 (3) A is the technological level, also known as the total factor productivity TFP, the exponents α, β are the elasticity of capital and labor, β = - α Another useful approximation Suppose 𝑌𝑡 = (1 + 𝑔𝑡 )𝑌𝑡−1, where gt is the rate of growth that changes over time Then: 𝑙𝑜𝑔 (𝑌𝑡 ) = 𝑙𝑜𝑔((1 + 𝑔𝑡 )𝑌𝑡−1 ) = 𝑙𝑜𝑔 (1 + 𝑔𝑡 ) + 𝑙𝑜𝑔(𝑌𝑡−1 ) (4) 𝑙𝑜𝑔 (𝑌𝑡 ) − 𝑙𝑜𝑔 (𝑌𝑡−1 ) = 𝑙𝑜𝑔 (1 + 𝑔𝑡 ) ≈ 𝑔𝑡 (5) 𝑙𝑜𝑔 (𝑌𝑡 ) = 𝑙𝑜𝑔 (𝐴𝑡 ) +∝ 𝑙𝑜𝑔 (𝐾𝑡 ) + (1−∝)𝑙𝑜𝑔(𝐿𝑡 ) (6) Take the logarithm of both sides of the production function (3): 𝑙𝑜𝑔 (𝑌𝑡−1 ) = 𝑙𝑜𝑔 (𝐴𝑡−1 ) +∝ 𝑙𝑜𝑔 (𝐾𝑡−1 ) + (1−∝)𝑙𝑜𝑔 (𝐿𝑡−1 ) (7) The 𝑙𝑜𝑔 (𝑌𝑡 ) function states that with an increase of 1% of capital or 1% of labor, output will increase by an amount α% or (1 - α)% of output respectively Subtract equation (6) from equation (7), we have: 𝑙𝑜𝑔 (𝑌𝑡 ) − 𝑙𝑜𝑔 (𝑌𝑡−1 ) = 𝑙𝑜𝑔 (𝐴𝑡 ) − 𝑙𝑜𝑔(𝐴𝑡−1 )+ ∝ (𝑙𝑜𝑔 (𝐾𝑡 ) − 𝑙𝑜𝑔 (𝐾𝑡−1 ) + (1−∝)(𝑙𝑜𝑔 (𝐿𝑡 ) − 𝑙𝑜𝑔 (𝐿𝑡−1 ) ) (8) Or have the growth accounting equation: 𝑔𝑡𝑌 = 𝑔𝑡𝐴 +∝ 𝑔𝑡𝐾 + (1−∝)𝑔𝑡𝐿 (9) The Cobb-Douglas production function model (9) shows that the main contributors to GDP growth are labor L growth, capital K growth, and the total factor productivity (TFP) growth Rearrange (9) to get TFP growth rate: 𝑔𝑡𝐴 = 𝑔𝑡𝑌 −∝ 𝑔𝑡𝐾 − (1−∝)𝑔𝑡𝐿 (10) Rearrange the growth accounting equation (9): 𝑔𝑡𝑌 − 𝑔𝑡𝐿 = 𝑔𝑡𝐴 +∝ (𝑔𝑡𝐾 − 𝑔𝑡𝐿 ) (11) 𝑔𝑡𝑌 − 𝑔𝑡𝐿 is the growth rate of GDP per worker (Y/L), sometimes known as labor productivity 𝑔𝑡𝐾 − 𝑔𝑡𝐿 is the growth rate of the capital-labor ratio (K/L) The increase in K/L is called capital intensity: each worker has more capital to work with Equation (11) states: at the aggregate-level labor productivity growth can be decomposed into the effects of increasing capital intensity and increasing TFP - these factors are keys in promoting labor productivity Contribution of capital, labor and TFP to economic growth Annually, the Vietnam General Statistics Office (GSO) publishes data on GDP and Gross Capital Formation, Fixed Capital Formation in the national account, but there is no data on the capital stock, so, to answer the important question: How inputs of capital, labor, and technological progress contribute to economic growth in Vietnam? The paper uses the above economic growth model and the data source of the APO Productivity Database 2019 (APO 2019) Data on GDP, capital stock and labor (total employment) in the APO Productivity Database 2019 are updated to 2017, so the author estimates more data of years 2018, 2019 and 2020 based on the latest published statistics of the GSO Data on GDP at basic price, Capital stock at constant prices (in 2017 prices) and Number of persons/jobs (Total employment) from 1970 to 2020 is shown in Figure From this data source, the paper calculates the growth rate of GDP, capital and labor from 1971 to 2020 60000 10000000 50000 8000000 40000 6000000 30000 4000000 20000 2000000 10000 0 GDP Capital stock Total employment Employment (thousand persons) 12000000 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 GDP, Capital (billion dong) Figure GDP, Capital stock and Total employment 1970-2020 Source: APO Productivity Database 2019 and author estimates Figure Growth chart shows that Vietnam's economy seems to have experienced a number of significant shocks and changes, most notably in 1975-80 (the first domestic economic crisis), 1985-86 (second domestic economic crisis), 1989-90 (collapse of the Soviet Union), 1998-99 (impact of 1997 Asian financial crisis), 19892013 (when bold reform policies shifted to the factor-driven market economy), and after 2014 the economy entered a transition period into efficiency-driven (Pham Minh Ngoc 2008) In 2020, due to the Covid-19 pandemic, the growth rate of GDP, capital and labor all are decreased, but the growth rates of GDP and capital are positive thanks to good disease control and a strong export sector in the face of this shock, labor growth is negative yet Clearly, the Covid-19 pandemic has deprived many workers of the opportunity to have formal jobs, making a part of them unable to find new jobs, others having to switch to informal unstable, unsustainable jobs Figure Growth of GDP, Capital and Employment 1971-2020 20,0 15,0 10,0 5,0 -5,0 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 0,0 -10,0 GDP growth Capital growth Employment growth Table shows the average annual growth rates of GDP, capital and labor per 5-year periods from 1971-2020 Table Average annual growth rate of GDP, capital and labor in period 1971-2020 1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 2011-2015 2016-2020 1971-2020 GDP growth Capital growth Employment growth 1.57 2.49 3.95 3.28 3.63 2.94 6.02 3.42 3.47 4.31 3.65 2.89 7.80 6.17 2.33 7.06 8.13 1.92 7.70 7.75 2.43 6.01 8.17 2.35 5.66 6.36 1.47 5.56 6.11 0.38 5.50 5.59 2.41 Running the model on gretl software, Cobb-Douglas Logarithmic regression has the following form: ^l_GDP = -2.31 + 0.820*l_K + 0.415*l_L (0.576) (0.0401) (0.106) T = 51, R-squared = 0.996 (Standard errors in parentheses) const l_K l_L Model 1: OLS, using observations 1970-2020 (T = 51) Dependent variable: l_GDP HAC standard errors, bandwidth (Bartlett kernel) Coefficient Std Error t-ratio p-value 0.575998 0.0002 −2.30525 −4.002 0.820248 0.0400582 20.48 0.1 means that the dummy variable E is not significant at a 10% significance level This result is the evidence against the hypothesis that the coefficient ≠ 0, in other words, the expected difference in growth rate when moving from factor-driven to efficiency-driven stage is almost absent due to the short transition period Figure Contribution of capital, labor and TFP in GDP growth in development stages 120,00 100,00 24,51 41,39 3,57 6,00 5,69 6,88 80,00 60,00 7,00 6,59 34,50 14,10 3,21 5,50 22,29 5,00 18,20 4,00 3,00 40,00 20,00 51,74 62,30 61,39 59,52 2,00 1,00 0,00 0,00 1971-1986 Capital contribution 1987-2013 2014-2020 Labor contribution 1971-2020 TFP growth GDP growth Figure shows that the average annual GDP growth rate in the 1971-1986 period was 3.57%, the period 1987-2013 was 6.59%, the period 2014-2020 was 5.69%, and the whole period 1971-2020 was 5.5% Capital is the major contributor to GDP growth, accounting for about 60% Contribution of labor tended to be decreased from 41.39% in the 1971-1986 period to 14.10% in the 1987-2013 period and to 3.21% in the 2014-2020 period, while the TFP growth rate contributed to GDP growth incremented by turn 6.88%, 24.51% and 34.5% Advances in technology create the increased output with the same inputs, and help improve productivity The biggest challenge facing Vietnam today is how to maintain its rapid and sustainable growth Vietnam needs to aim to increase productivity and the quality of its human resources to achieve higher economic growth The sufficient conditions are to have a commitment to avoid the risk of lag, take bolder steps in reform, create a competitive environment among different economic competitors, increase human capital by improving the quality and efficiency of the labor market, enhancing the innovation factor from factor-driven stage to efficiency-driven economy The consequences of macroeconomic instability associated with the previous growth model have set the requirements for economic restructuring and growth model transformation In that direction, increasing total factor productivity - through improving technical efficiency, distribution efficiency, and developing science and technology - is a very urgent requirement This is also the content with plenty of room for implementation, while the potential to increase the (capital, labor, land, fixed assets, etc.) input factors for economic activity is slowly running out 12 Currently, the Covid-19 pandemic is sweeping fiercely on the worldwide scale, causing unprecedented negative impacts on the world and Vietnam economies It affects two pillars of the global economic growth: trade and investment, and thus will also reduce global output growth Covid-19 has also shown the necessity for stronger reforms to help the economy recover in the medium term, such as improving business environment, promoting the digital economy, and enhancing public investment effectiveness and efficiency, which are some of the key agendas for Vietnam to consider stronger and faster reform actions Conclusion In this analysis, we have shown that the Cobb-Douglas production function with the exponential constant of labor and capital can explain data on GDP growth in Vietnam over the period 1970-2020 The Cobb-Douglas Logarithmic function regression statistics revealed some interesting information and policy implications related to the Vietnam's economy which can be summarized as follows: (1) Capital was the main factor contributing to the country's economic growth during the reference period, especially during the period of high growth 1995-2010 Capital contributed from 51.74% in 1971-1986 period to 61.39% in 1987-2013 period and 62.3% in 2014-2020 period to GDP growth, however, the use of capital is not effective (2) Labor is an important input to the production process, but since the innovation years (1986) the share of labor contribution to economic growth tends to be decreased, instead contribution of technology increased In the 1971-1986 period, the labor contributed 41.39% to the growth, the period 1987-2013 was 14.1% and in the period 2014-2020 decreased to 3.21%; meanwhile, TFP's contribution to growth was increased from 6.88% to 24.51% and 34.5% respectively This shows that technology role is getting more and more attention, while the quality of human resources is not high, that is the "bottleneck" inhibits economic growth (3) Under (labor and capital) input limited conditions, increasing labor productivity is the only path to long-term sustainable economic growth The growth rate of labor productivity (0.01%) almost unchanged during the subsidized centrallyplanned years (1971-1986), increased to 4.35% in the innovation in width period (1987-2013) and to 5.25% in the next renovation in depth period (2014-2020) Although the TFP growth rate has gradually increased, capital intensity is still the main factor contributing to the increase in labor productivity during this period Vietnam's labor productivity is still low compared to the labor productivity of many countries in the region To increase labor productivity higher, Vietnam needs to use more effectively existing resources and accelerate productivity growth of TFP even more (4) Market-oriented institutions have had a positive impact on economic growth, bringing about impressive progress in growth, but the growth efficiency is still low The growth rate of GDP and the growth rate of labor productivity increased highly in the years from 1991 to 2005, but these growths were somewhat slowed in the period 2006-2010 because the economic growth model based on resources did not create quality of human resources At the same time, technology transfer remains weak, only after Vietnam transitions to an efficiency-driven stage, GDP growth and labor productivity growth have recovered and expanded 13 (5) In order to create a model of economic growth in depth in the next period, it is necessary to focus on innovation, improving the quality of human resources, applying advanced, modern scientific and technological progress Under current conditions in Vietnam, special investment must be made to innovation and creativity, promote scientific and technological progress, because innovation, scientific and technological progress will change the way of working into a faster, more efficient manner, and create new products with higher quality and value Thanks to the promotion of scientific and technological progress, new innovation can take over the more difficult parts of the production, the stages of a more difficult production process with a higher rate of value added in the value chain That also means creating a higher TFP growth rate and greater labor productivity Among the transition directions, the institutional transformation direction is the most important The difference between a middle developed, underdeveloped, and a developed country is primarily institutional Institutions must be appropriate for the times This is considered an important decisive factor of the national competitiveness so that the country's economy will move from an efficiency-driven economy to an innovation-driven economy – to a knowledge economy Demand for economic restructuring associated with the growth model transformation; complete market economic institutions; development of science - technology, creativity innovation In the present time, implementing digital economic transformation is becoming more urgent than ever because it is a way for the economy to grow rapidly and sustainably, catch up with the advanced countries and achieve the vision of building Vietnam in a mighty and prosperous country Contribution of the study Although there have been many studies in Vietnam and abroad that have identified the factors affecting economic growth with parametric or non-parametric approaches This study uses the Cobb-Douglas production function with the assumption of the exponential constants of labor and capital and includes dummy variables explaining Vietnam's economic development stages from 1970 to 2020 to answer the question: what determines Vietnam's long-term growth rate The CobbDouglas Logarithmic function regression statistics revealed some interesting information and policy implications regarding the Vietnamese economy as the marketoriented institutions have had a positive impact on economic growth, bringing about impressive progress in growth, but the growth efficiency is still low The analysis showed that the economic growth is not simply about producing more, increasing more, but also accompanied by changes in production structure and consumption Economic growth can only be sustained in the long term if necessary foundations are built The foundations for long-term economic growth are not only based on increasing inputs (such as capital, labor, and land), but are also formed and strengthened by appropriate motivational systems to encourage labor productivity and total factor productivity, reflected in knowledge addition, technological advancement, and labor skills Nowadays Covid-19 affects all aspects of socio-economic life, negatively affects economic growth, trade activities, labor, employment and income of workers, however, the Covid-19 pandemic also brings new and clearer perspectives on 14 development opportunities and contributes to accelerating the digital transformation of the economy The great benefits in applying the results of the Fourth Industrial Revolution bring a clearer view, new products appeared and widely developed These trends require institutional and regulatory changes to boost the digital economy to develop In essence, it is also the process of innovation and industrialization that developing countries like Vietnam have been trying to carry out REFERENCES APO 2019 APO Productivity Databook 2019 Tokyo Dale W Jorgenson 1988 “Productivity and Economic Growth, Fifty Years of Economic Measurement” The Jubilee of the Conference on Research in Income and Wealth, University of Chicago Press Klaus Schwab 2018 The Global Competitiveness Report 2017–2018 World Economic Forum: Geneva OECD 2001 Measuring Productivity MEASUREMENT OF AGGREGATE AND INDUSTRY-LEVEL PRODUCTIVITY GROWTH, OECD Manual France Phan Minh Ngoc 2008 “Sources of Vietnam’s Economic Growth” SAGE Journals: Vol 8, Issue 3, 2008 Kyushu University: Japan R.V.S.S Nagabhushana Rao, V.Munaiah, J Prabhakara Naik, K.Vasu, G Mokesh Rayalu 2017 “Estimation of Cobb-Douglas Production Function in Econometric Model” International Journal for Research in Applied Science & Engineering Technology (IJRASET) ISSN: 2321-9653 IC Value: 45.98 SJ Impact Factor: 6.887, Volume Issue XII December 2017 Solow, R., A 1956 “Contribution to the Theory of Economic Growth” The Quarterly Journal of Economics, 70, 65-94 15 ... influencing growth of the economy The question arises: what determines the longterm growth rate of an economy? The economy achieves growth from two sources: first, by increasing the amount of its inputs... the role of savings and investment in economic growth is emphasized, investment only makes increasing per capita income in the transition period due to decreasing marginal productivity of capital;... capital intensity are calculated from formula (11) Figure shows the contribution of increasing capital intensity and increasing TFP to increasing labor productivity The increasing level of technology