(Luận văn) financial development and economic growth in vietnam, a quantitative assessment

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS t to ng hi VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ep w n lo ad ju y th yi pl FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN VIETNAM: A QUANTITATIVE ASSESSMENT n ua al n va ll fu oi m nh BY at LÊ TẤN BỬU DUY z z k jm ht vb l.c gm MASTER OF ARTS IN DEVELOPMENT ECONOMICS om an Lu n va ey t re HO CHI MINH CITY, April 2014 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS t to ng hi ep VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS w n lo ad ju y th yi pl n ua al FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN VIETNAM: A QUANTITATIVE ASSESSMENT n va ll fu oi m A thesis submitted in partial fulfilment of the requirements for the degree of at nh MASTER OF ARTS IN DEVELOPMENT ECONOMICS z z k jm ht vb om l.c LÊ TẤN BỬU DUY gm By an Lu n va ey DƯƠNG NHƯ HÙNG t re Academic Supervisor: ACKNOWLEDGEMENT I want to send special thanks to my academic supervisor, Dr Duong Nhu Hung, for his t to patience as well as his continuous supports and valuable comments during my thesis ng hi writing process ep I am also thankful to all of the lecturers in VNP for their wonderful lessons, to all w n administrators in the VNP Office for their supports, and especially to Mr Nguyen Dinh lo Quy for being so helpful every time I come to the VNP Library ad y th Finally, I want to show my gratitude to my family and my friends for their endless ju yi encouragements to me so that I could finish the program as well as the thesis pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va ey t re ABSTRACT The thesis employs two quantitative methods to explore the relationship between t to economic growth and financial development in Vietnam using quarterly data from 1999 ng to 2012 Firstly, the ARDL cointegration test developed by Pesaran and Shin (1999), and hi ep Pesaran, Shin, and Smith (2001) was used to search for a long run relationship among economic growth, financial development, and other macroeconomic variables including w n exports, imports, inflation, and real interest rate The existence of such long run lo ad cointegration relationship is confirmed through the ARDL bound testing procedure with y th all four indicators of financial development, namely ratio of M2 to GDP, ratio of deposits ju to GDP, ratio of credits to GDP, and ratio of credits provided to the private sector to yi GDP Secondly, Toda and Yamamoto (1995) causality test was employed to determine pl ua al the causal relationship between economic growth and financial development under a multivariate VAR framework Evidence of causality running from financial development n n va to economic growth is found for all indicators of financial development These results provide strong support to the supply-leading hypothesis on the relationship between fu ll economic growth and financial development for the case of Vietnam oi m at nh z z k jm ht vb om l.c gm an Lu n va ey t re ACRONYMS AND ABBREVIATIONS t to ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va ey t re TABLE OF CONTENTS CHAPTER 1: INTRODUCTION t to ng hi ep 1.1 PROBLEM STATEMENT 1.2 RESEARCH OBJECTIVES AND QUESTIONS 10 1.3 RESEARCH METHODOLOGY 11 1.4 STRUCTURE OF THE THESIS 11 w n CHAPTER 2: LITERATURE REVIEW 12 lo KEY CONCEPTS 12 ad 2.1 y th Economic Growth 12 THEORETICAL REVIEW 12 yi 2.2 ju Financial Development 12 pl 2.2.1 Theoretical Hypotheses 12 al n ua 2.2.2 Financial Repression Theory 14 2.2.3 Financial Liberalization Theory 15 va n 2.2.4 Financial Structure Theory 17 fu Bank-based Theory 17 ll oi m Market-based Theory 19 nh Other Views in Financial Structure Theory 21 at 2.2.5 Endogenous Growth Theory 22 z 2.2.6 Summary of Theoretical Predictions 25 z EMPIRICAL REVIEW 26 ht vb 2.3 jm 2.3.1 Traditional Cross-Country Analysis 26 k 2.3.2 Panel Cointegration and Causality Analysis 27 gm 2.3.3 Time series analysis 29 l.c VECM Approach 29 om VAR Approach 32 2.3.4 Previous empirical studies about Vietnam 35 an Lu 2.3.5 Summary of findings from previous empirical studies 35 CONCEPTUAL FRAMEWORK 26 n va 2.4 ANALYTICAL FRAMEWORK 38 3.2 MODEL SPECIFICATION AND DATA COLLECTION 39 Economic Growth (EG) 39 Financial Development (FD) 40 ey 3.1 t re CHAPTER 3: RESEARCH METHODOLOGY AND DATA COLLECTION 38 Trade (EX, IM) 41 Inflation (INF) 43 Real Interest Rate (RIR) 44 t to 3.3 ECONOMETRIC TECHNIQUES 45 ng 3.3.1 Seasonal Adjustment 45 hi ep 3.3.2 Unit Root Test 47 3.3.3 ARDL Cointegration Test 48 w 3.3.4 Toda and Yamamoto Causality Test 50 n lo ad CHAPTER 4: OVERVIEW OF ECONOMIC GROWTH AND FINANCIAL DEVELOPMENT IN VIETNAM 53 y th ECONOMIC GROWTH 53 ju 4.1 yi 4.1.1 Overview 53 pl 4.1.2 Results 53 al n ua Structural Changes 53 Global Integration 55 va n 4.1.3 Challenges 56 fu ll Investment-driven Economic Growth 56 oi m Inefficient SOEs and Public Investments 57 FINANCIAL DEVELOPMENT 58 at 4.2 nh Macroeconomic Instability 58 z 4.2.1 Overview 58 z ht vb 4.2.2 Results 59 jm Banking Market 59 k Stock Market 62 om l.c gm 4.3 A FIRST LOOK ON THE RELATIONSHIP BETWEEN ECONOMIC GROWTH AND FINANCIAL DEVELOPMENT 64 CHAPTER 5: EMPIRICAL RESULTS 65 an Lu 5.1 Seasonal Adjustments 65 5.2 Preliminary Analysis 66 va 5.3 Unit Root Test 69 6.1 Summary and Conclusions 77 ey CHAPTER 6: CONCLUSIONS 77 t re 5.5 Toda and Yamamoto Causality Test 72 n 5.4 ARDL Cointegration Test 70 6.2 Limitations 78 6.3 Directions for Further Research 79 t to REFERENCE 80 ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va ey t re LIST OF TABLES Table 2.1: Summary of theoretical predictions 25 t to Table 2.2: Findings from previous empirical studies 36 ng Table 3.1: Critical values for ADF test 48 hi ep Table 3.2: Critical values for bound F-test 50 Table 4.1: Proportion of output from different economic sectors 54 w Table 4.2: Industrial output share by ownership 54 n lo Table 4.3: : Investment share by ownership 55 ad Table 4.4a: Structure of goods exports by kinds of economic sector 56 y th Table 4.4b: Structure of goods imports by kinds of economic sector 56 ju yi Table 4.5: Growth accounting of Vietnam from 1990 to 2007 56 pl Table 5.1: Descriptive statistics 68 al ua Table 5.2: Correlation coefficients 69 n Table 5.3: Results of ADF test 70 va n Table 5.4: AIC, SBC, F-statistic, t-statistic, and LM for different lag-lengths 71 ll fu Table 5.5: Optimal lag-length p chosen by AIC, SC, and LR test 73 oi m Table 5.6: Results of VAR residual autocorrelation LM test 74 at nh Table 5.7: Toda and Yamamoto causality test results 75 z z LIST OF FIGURES vb jm ht Figure 4.1: Openness, export, import, and net export (as percents of GDP) of Vietnam 55 Figure 4.2: The incremental capital-output ratio (ICOR) of Vietnam in 1991-2009 57 k gm Figure 4.3: Number of banks in Vietnam from 2006 to 2010 60 l.c Figure 4.4a: Deposit market share according to type of banks in 2005-2010 60 om Figure 4.4b: Credit market share according to type of banks in 2005-2010 60 an Lu Figure 4.5: Ratio of banking credits and deposits to GDP 61 Figure 4.6: GDP growth and credit growth of Vietnam from 2000 to 2012 64 ey Figure 5.3: Graphical presentations of all variables from 1999 to 2012 66 t re Figure 5.2: Seasonal adjusted real GDP and nominal GDP from 1999Q1 to 2012Q3 66 n va Figure 5.1: Real GDP and nominal GDP from 1999Q1 to 2012Q3 65 CHAPTER 1: INTRODUCTION The chapter introduces the necessary of a quantitative analysis of the relationship between t to financial development and economic growth of Vietnam Then it will discuss about the ng objectives of the thesis, the questions to be answered in the thesis, and the econometric hi ep techniques used to answer those questions The chapter ends by providing the structure of the thesis w n lo PROBLEM STATEMENT ad 1.1 ju y th The relationship between financial development and economic growth was first examined in a research by Schumpeter in 1911 (as cited in King and Levine, 1993a) However, it only yi pl receives great attention from economists since the seminal studies of McKinnon (1973), ua al Shaw (1973), and King and Levine (1993b) Despite of the high volume in both theoretical n and empirical research, the direction in the relationship is still not conclusive yet The va research results on the relationship could be classified into five categories, each supporting n ll fu one of the followings hypotheses: Supply-leading hypothesis (Patrick, 1966): financial development increases the oi m i nh efficiency in the allocation of economic resources and thus could promote economic at growth eventually z Demand-following hypothesis (Patrick, 1966): financial development might passively z ii vb jm ht follow economic growth as higher level of income will lead to higher demand for financial services k Bi-directional causality hypothesis: financial development causes economic growth gm iii l.c and conversely the development of the economy also induces the development of the Independent hypothesis: the role of financial development in economic growth an Lu iv om financial sector process is overstated; there is no relationship between financial development and va Stage of development hypothesis (Patrick, 1966): in the early stage of economic hypothesis dominates ey growth, the supply-leading hypothesis takes the lead Then, the demand-following t re v n economic growth Table 5.5: Optimal lag-length p chosen by AIC, SC, and LR test t to ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z vb Notes: ht M2 = ratio of M2 to GDP, DEP = ratio of bank deposits to GDP, CRE = ratio of bank credits to GDP, PCRE = jm ratio of credits to private sector to GDP k LR = Likelihood ratio test statistic, AIC = Akaike information criterion, SC = Schwarz information criterion l.c gm * indicate the optimal lag-length chosen by the criterion Source: self-calculation using Eviews om The results from Table 5.5 shown that while both LR test and the AIC criterion choose as an Lu the optimal lag-length for our VAR system, the choice of SC criterion is From these as shown in Table 5.6 below 67 ey which is best mitigated from the autocorrelation problem, comparing with other lag-lengths t re causality testing procedure, the modified Wald test is performed against the VAR(5) system n test The reason is that with this choice, in the second step of the Toda and Yamamoto va results, we will choose as the optimal lag-length in the first step of the Toda and Yamamoto Table 5.6: Results of VAR residual autocorrelation LM test t to ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb gm Notes: l.c M2 = ratio of M2 to GDP, DEP = ratio of bank deposits to GDP, CRE = ratio of bank credits to GDP, PCRE = ratio of credits to private sector to GDP om Source: self-calculation using Eviews an Lu Recall that in the unit root test results in Table 5.3 had shown that the maximum order of n va integration among all variables is k = Also p = has been chosen as the optimal lag-length yt  B0  B1 yt 1  B2 yt 2   B p yt  pk   t 68 ey setting up the following VAR (p + k) = VAR (5) model: t re for our VAR system in step The second step in the Toda and Yamamoto causality test is where t to ng hi ep GDPt  1     EX t     y t   IM t  , B0     INF   t     FDt          1t    i ,11 i ,12 i ,15   2t     i,21 i,22 i,25     , B  (i = 1,2, ,5) ,  t   3t    i        4t  i,51 i,52 i ,55         5t  w n lo In the above VAR (5) model, the 5th lagged values of all variables enter exogenously so that ad the modified Wald test statistic in Toda and Yamamoto (1995) could follow a Chi-squared y th distribution and hence the conventional causality test could be employed Results from ju yi causality test on the above VAR (5) model are shown in Table 5.7 below pl al n ua Table 5.7: Toda and Yamamoto causality test results n va ll fu oi m at nh z z ht vb Notes: jm M2 = ratio of M2 to GDP, DEP = ratio of bank deposits to GDP, CRE = ratio of bank credits to GDP, PCRE = k Source: self-calculation using Eviews om l.c ***, **, *: significant at 1%, 5%, and 10% respectively gm ratio of credits to private sector to GDP an Lu Results from Table 5.7 show that the modified Wald test statistics are significant All four indicators of financial development are found to have Granger cause to economic growth at (2012b), economic growth of Vietnam from 2000 to 2010 relied heavily on investments 69 ey this result is as follows According to the estimations of CIEM (2010) and World Bank t re development is taking the lead in its relationship with economic growth The explanation for n financial development is not found for any indicator This result implies that financial va 5% level of significance However, the reverse causality running from economic growth to because Vietnam’s growth accounting shown that capital always made up around an average of 71% of economic growth in this period Additionally, the nature of investments in developing countries is debt-financing (Shaw, 1973) or self-financing after a period of capital t to accumulation through savings Thus, the development of financial activities of Vietnam, ng hi which is reflected by rapid credit expansion, increasing in the ability of capital attraction, and ep high level of monetisation in this period, should have lift up the potential capital constraints in a Vietnam’s developing economy, speed up the investment rate and hence become a source w n of economic growth for Vietnam lo ad y th The result from Toda and Yamamoto causality test provides strong support for the theoretical ju supply-leading hypothesis of Patrick (1966) Moreover, given that Vietnam has just begun a yi pl lower middle income country in 2010 and the financial system of Vietnam could not be ua al considered as a highly developed one, results of the causality test also provide initial support n for the theoretical stage of development hypothesis of Patrick (1966) On the empirical side, n va results of causality test from the thesis are in line with many of the previous empirical studies ll fu on the relationship between economic growth and financial development at Asian or m developing countries Such evidences in favour of the supply-leading hypothesis could be oi found in the study of Chang and Caudill (2005) on Taiwan, Rousseau and Vuthipadadorn nh at (2005) on 10 Asian countries, Ang and McKibbin (2007) on Malaysia, and Bojanic (2012) on z Bolivia However, results from the thesis are contrast with previous empirical studies on z vb developed and high income country such as the study of Shan, Morris, and Sun (2001) on jm ht OECD countries plus China, and Thangavelu and Ang (2004) on Australia These facts are k understandable via the predictions of the stage of development hypothesis postulated by l.c gm Patrick (1966) whereas at initial stage of development the supply leading hypothesis takes place, until the country has achieved some level of economic development, the relationship om between economic growth and financial development switch to the demand-following an Lu phenomenon n va ey t re 70 CHAPTER 6: CONCLUSIONS This chapter will begin by summarizing the empirical results of this thesis and then providing t to the conclusions on the relationship between economic growth and financial development in ng Vietnam from 1999 to 2012 After that, the limitations of the thesis are discussed Finally, the hi ep directions for further research are mentioned w 6.1 Summary and Conclusions n lo This thesis employs two quantitative methods to explore the relationship between economic ad growth and financial development in Vietnam using quarterly data from 1999 to 2012 y th Firstly, the ARDL cointegration test developed by Pesaran and Shin (1999), and Pesaran, ju yi Shin, and Smith (2001) was used to search for a long run relationship among economic pl growth, financial development, and other macroeconomic variables including exports, al ua imports, inflation, and real interest rate The existence of such long run cointegration n relationship is confirmed through the ARDL bound testing procedure with all four indicators va n of financial development, namely ratio of M2 to GDP, ratio of deposits to GDP, ratio of fu ll credits to GDP, and ratio of credits provided to the private sector to GDP Secondly, after m some priori relationship among economic growth, financial development and other oi nh macroeconomic variables has been established, Toda and Yamamoto (1995) causality test at was launched to determine the causal relationship between economic growth and financial z z development under a multivariate VAR framework Evidence of causality running from vb financial development to economic growth is found for all indicators of financial ht k jm development gm Theoretically, results from the thesis provide support to the supply-leading hypothesis of l.c Patrick (1966) which is predicted by most of the theoretical models and studied in the om literature such as financial liberalization theory, bank-based theory, and endogenous growth an Lu theory that financial development could boost the capital accumulation process as well as enhance the productivity of capital utilization within the economy The thesis also provides Caudill (2005), Rousseau and Vuthipadadorn (2005), Ang and McKibbin (2007), Bojanic 71 ey empirical studies at developing countries or countries in the Asian region such as Chang and t re economic growth and financial development in Vietnam is similar with results from previous n like Vietnam On the empirical front, such causality direction in the relationship between va evidence supporting the prediction of bank-based theory for the case of a developing country (2012) From the policy making perspective, this important role of financial development to economic growth has several policy implications Firstly, reforms of the banking system such as restructuring banks and resolving bad debts in the system should have higher priority in t to government’s policy of stabilizing the macroeconomic environment because it also has ng hi positive spill-over effects to economic growth Secondly, similar to the suggestion in ep Calderon and Liu (2003), such support of the supply-leading hypothesis should give financial development higher priority in future economic growth policy of Vietnam Thirdly, the w n financial markets of Vietnam are still not considered as being developed thus according to the lo ad bi-directional hypothesis of Patrick (1966), Vietnam’s government should spend effort to y th implement further financial development policy so that the positive relationship between ju economic growth and financial development could be tightened, enhanced and become a two- yi pl way relationship Finally, the stock market of Vietnam is still small comparing with the ua al banking market and is still being underdeveloped comparing with other countries in the n region and in developed countries thus there is still a large room for further development n va Vietnam’s government should provides the necessary conditions so that the stock market ll fu could evolve and become another important and efficient channel of mobilizing surplus oi m capital into to businesses within the economy and thus promote further economic growth at nh 6.2 Limitations The thesis followed many of the previous empirical studies in choosing standard indicators to z z cover different aspects of the financial system to capture its development level However, vb jm ht these variables only represent the quantity but not the quality of the financial services being provided in the economy This limitation of data availability not only in Vietnam but also in k gm other developing countries has prevented the utilization of any indicator reflecting how om l.c effective the financial activities are arranged in the economy to our empirical study The second limitation of the thesis is related to the sample size of the dataset used in the an Lu thesis All the econometric methods employed in the thesis including ADF unit root test, ARDL cointegration test, and Toda and Yamamoto test are very sensitive to the choice of efficient and accurate 72 ey lag-lengths so that the estimations in the econometric procedures listed earlier could be more t re development, exports, imports, and inflation of Vietnam has prevented us to choose higher n observations available for the variables representing economic growth, financial va lag-length to be included in the estimations However, the limitation of the number of The third limitation of the thesis is also related to the small sample size problem Due to this problem, the thesis could not employ any structural change test such as Chow’s break point test or Quandt-Andrews break point test against the data set being used in the thesis The t to reason is that to detect any structural change problem for a particular estimation, those tests ng hi will make the estimation twice, one for a sub-sample separated by the pre-determined break ep point (Chow’s break point test) or gradually moving break point (Quandt-Andrews break point test), then compare the two estimation results for any structural change However, our w n limitation of the number of available observations not allows us to make such estimation lo ad with many lags y th ju 6.3 Directions for Further Research yi pl Once financial development has been found to have significant and positive to economic ua al growth, it is worth to research to determine the growth transmission channels and the n marginal effects through each channel Having this knowledge will allow policy makers to n va obtain better estimates of the effect of future growth enhancing policies which related to the ll fu financial system Additionally, another direction research had been provided in Levine m (2004) According to him, the long run effect of financial development to economic growth oi will generate the need to explore for the “political, legal, regulatory, and policy determinants nh z indirect growth promoting policy to be shaped at of financial development” Better knowledge of these determinants will make ways for other z k jm ht vb om l.c gm an Lu n va ey t re 73 REFERENCE t to Abu-Bader, S., & Abu-Qarn, A S (2008a) Financial development and economic growth: The Egyptian experience Journal of Policy Modelling, 30, 887-898 ng hi ep Abu‐Bader, S., & Abu‐Qarn, A S (2008) Financial development and economic growth: empirical evidence from six MENA countries Review of Development Economics, 12(4), 803-817 w Allen, F., & Gale, D (1999) Diversity of opinion and the financing of new technologies Journal of Financial Intermediation, 8, 68-89 n lo ad ju y th Ang, J B (2008) A survey of recent developments in the literature of 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