Structural transformation and economic growth of asian developing countries and vietnam

INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS STRUCTURAL TRANSFORMATION AND ECONOMIC GROWTH OF ASIAN DEVELOPING COUNTRIES AND VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TRAN THIEN T AI Academic Supervisor: Dr TRAN TIEN KHAI HO CHI MINH CITY, NOVEMBER 2012 ACKNOWLEDGEMENT Joining classes of rural development was conducted by Dr Ha Thuc Vien, Dr Tran Tien Khai and was hold by the Vietnam Netherlands Program have encouraged me confident to write this paper ahead I would like to express my sincere thank to Dr Nguyen Trong Hoai, Dr Pham • Khanh Nam for all valuable academics coaching I would like to express my special thanks to Dr Tran Tien Khai, my supervisor, who provides me directive suggestions during the thesis performing I would like to thank all professors in the teaching board of MDE program, who have helped me accumulate valuable knowledge to acquire this study I would like to express my appreciation and thank to my bosses, Mr Allan Y ong and Mr Pham Quoc Hung, Mr Min Soo Kim for creation condition to my successful of this research I am also grateful to my classmate, Mr Le Anh Khang for his valuable support in econometric, Mr Nguyen Van Dung for his support to coach how to search reference paper and access databases Finally I would like to express my deeply appreciation and thank to my mother, my wife for spiritual support • ABSTRACT This paper investigates the structural transformation and growth of some developing Asian countries and Vietnam, using data extracted from World Development Indicator and Global Finance Development ofWorld Bank from 1985 to 2010 The paper uses polynomial model regression and description statistics method Findings from the paper includes: (1) except Korea and Malaysia, others Asian developing countries are all in the first phase of structural transformation • Agriculture sector trends to decrease once GDP per capita increases Industry sector trends to increase once GDP per capita increases Service sector increases once ' GDP per capita increases; (2) the threshold of structural transformation from the first phase to the second phase is when GDP per capita equals US$ 6,600 per person At that level, sectoral share of agriculture, industry, and services reach 7%, 45% and 48% respectively; (3) Asian developing countries including Vietnam are not all followed the same process and are not homogeneity of structural transformation; (4) compared to Malaysia, Thailand and the Philippines, the share of agriculture in GDP of Vietnam is still high and is the highest in the four countries The share of services in GDP of Vietnam is always the lowest in the four studied countries; (5) the rate of labor distribution in the agricultural sector of Vietnam is high compared to Malaysia, Thailand, and the Philippines and in the opposite direction, the rate of labor in services of Vietnam is low compared to Malaysia, Thailand, and the Philippines; (6) labor productivity in all three sectors of Vietnam are lower than Malaysia, Thailand, and the Philippines but the most inefficient is agricultural sector, followed by the service and industrial Key Words: structural transformation, GDP per capita, growth, Asian developing countries, Vietnam TABLE OF CONTENT CHAPTER 1: INTRODUCTION ? -~ CHAPTER2: LITERATURE REVIEW 2.1 Theoretical review 2.2 Empirical studies 13 2.3 Conceptual framework 17 CHAPTER 3: RESEARCH METHOLODOGY 21 • 3.1 Data 21 3.2 Research methodology 21 j CHAPTER 4: EMPIRICAL ANALYSIS OF STRUCTRUAL TRANSFORMATION AND GROWTH 25 4.1 Overview of economic growth of Asian developing countries in period 1985 -2010 25 4.2 Experimental study result of structural transformation Asian developing countries during 1985-2010 30 4.2.1 Result of statistics descriptive model 30 4.2.1.1 Korea 30 4.2.1.2 Malaysia 36 4.2.1.3 Thailand 37 4.2.1.4 China 38 4.2.1.5 India 40 4.2.1.6 Sri Lanka 41 4.2.1.7 The Philippines 42 4.2.1.8 Indonesia 43 4.2.1.9 Vietnam 44 4.2.1.10 Nepal 46 4.2.2 Result of economestric model .48 4.2.3 Structural transformation and labor productivity of Vietnam and acomparision with Malaysia, Thailand and the Philippines 56 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 69 5.1 Conclusions 69 : 5.2 Recommendations 70 5.3 Limitations 71 REFERENCES 72 APPENDIX 75 LIST OF TABLES Table 1: Average GDP growth of Asian developing countries in period 1985-2010 (%) 26 Table 2: GDP per capita of Asian developing countries (current, US$) 28 Table 3: Average GDP per capita growth 1985-2010 (%) 29 Table 4: Summary Regression Result for Asia Developing Countries 49 Table 5: Fixed Effect Deviation from the Mean 51 Table 6: GDP per capita of Vietnam, Malaysia, Thailand and the Philippines 57 Table 7: Sectoral labor productivity of Vietnam (US$ per person per year) 67 Table 8: Agriculture output share ofVietnam, Malaysia, Thailand and the Philippines (o/o of GDP) 75 Table 9: Industry output share of Vietnam, Malaysia, Thailand and the Philippines (o/o ofGDP) 76 Table 10: Service output share of Vietnam, Malaysia, Thailand and the Philippines (% ofGDP) 77 Table 11: Agriculture employment share of Vietnam, Malaysia, Thailand and the Philippines(%) 78 Table 12: Industry employment share of Vietnam, Malaysia, Thailand and the Philippines (o/o) 78 Table 13: Service employment share ofVietnam, Malaysia, Thailand and the • I Philippines (o/o) 79 Table 14: Agriculture labor productivity of Vietnam, Malaysia, Thailand and the Philippines (US$ per person per year) 79 Table 15: Industry labor productivity of Vietnam, Malaysia, Thailand and the Philippines (US$ per person per year) 80 Table 16: Service labor productivity of Vietnam, Malaysia, Thailand and the Philippines (US$ per person per year) 80 LIST OF FIGURES Figure 1: Conceptual framework- structural transformation and growth 20 Figure 2: Average GDP growth of Asian developing counties, 1985-2010 (%) 26 Figure 3: GDP per capita 1985 and 2010 (current, US$) 28 Figure 4: GDP per capita of Asian developing countries 1985-2010 30 Figure 5: Structural transformation of Asian developing countries 1985 and 2010 Time series 36 • Figure 6: Scatter chart of agriculture output share and Log of GDP per capita 52 Figure 7: Scatter chart of industry output share and Log GDP per capita 53 Figure 8: Scatter chart of service output share and Log GDP per capita 54 Figure 9: Structural transformation of Asian developing Countries 56 Figure 10: GDP per capita of Vietnam, Malaysia, Thailand and the Philippines 58 Figure 11: Strutural transformation ofVietnam, Malaysia, Thailand and the Philippines 59 Figure 12: Sectoral employment share ofVietnan 1996-2009 60 Figure 13: Sectoral employment share of Vietnam, Malaysia, Thailand and the Philippines 61 Figure 14: Sectoral employment share ofVietnam, Malaysia, Thailand and the Philippines 62 Figure 15: Labor productivity in agriculture sector ofVietnam, Malaysia, Thailand and the Philippines 64 Figure 16: Labor productivity in industry sector of Vietnam, Malaysia, Thailand and the Philippines 65 Figure 17: Labor productivity in service sector of Vietnam, Malaysia, Thailand and the Philippines 66 Figure 18: Sectoral labor productivity ofVietnam 68 LIST OF ABBREVIATIONS ! ASEAN: Association of South-East Asian Nations FE: Fixed Effect GDP: Gross Domestic Product GSO: General Statistics Office MPL: Marginal Product of Labour WB: World Bank TFP: Total Factor Productivity SEA: South East Asian CHAPTER 1: INTRODUCTION Some • empirical studies show structural transformation process is accompanied with economic growth of developed countries By history record, Kuznets ( 1971) in Economic of Nations emphasizes that there are six characteristics that every developed country manifested in the process of economic growth One of them is the high rate of structural transformation ofthe economy Chenery (1979) in Structural Change and Development Policy examines the pattern of development of some developing countries after World War II period The empirical study identifies several characteristic features of development process One of them is the shift away from agricultural to industrial production Asian developing countries, including Vietnam, are under developing process Therefore, they maintain sustainable growth in the last two decades During 19912010, China achieved 10.5% average annual growth rate in GDP Following by Vietnam maintained at 7.4%, India 6.6%, Malaysia 6.0% and Korea 5.2% (World Bank, 2012) The rapid economic growth of Asian developing countries has increased its important role in the world economy Especially in the time of world economic crisis and the European public debt crisis recently, China and India have played a key role as important investors in supporting the US and European countries to overcome the crises Respective of economic growth, structural transformation of Asian developing countries has changed continuously It is useful to analyze what is the structural transformation process of Asian developing countries including Vietnam? Despite of maintaining a high economic growth rate in the last two decades, GDP per capita of Vietnam is still in low level versus others Asian developing countries GDP per capita of Vietnam improved significantly from 143 US$ in 1991 to 1,224 US$ in 2010 but it was still in low level versus Korea 20,7 56 US$, Malaysia 8,3 72 US$, Thailand 4,608 US$ and the Philippines 2,140 US$ per person in 2010 respectively (World Bank, 2012) Therefore, an analysis of structural transformation process of Vietnam in the context of other Asian developing countries will be a helpful topic to Vietnamese policymakers My paper tries to achieve three main objectives: (1) to analyze structural transformation process of some Asian developing countries, including China, India, Indonesia, Korea, Malaysia, Nepal, the Philippines, Sri Lanka, Thailand and Vietnam, during 1985-20 10; (2) to analyze labor productivity of between Vietnam and Malaysia, Thailand and the Philippines; (3) to implicate ways to improve structural transformation process of Vietnam Therefore, the main questions of this paper research are: (1) how is the structural transformation process of Asian developing countries? (2) is the structural transformation process of Asian developing countries homogenous? (3) what are the differences of structural transformation process and labour productivity between Vietnam and Malaysia, Thailand and the Philippines? These questions will be answered upon the analysis in chapter four The paper IS continued with following chapters Chapter two recalls the literature review including the theories and empirical studies of structural transformation in the world and Vietnam Chapter three describes the dataset and research methodology Chapter four analyzes the structural transformation process of Asian developing countries and the comparison of structural transformation and labor productivity of Vietnam versus Malaysia, Thailand and the Philippines Base on the main findings identified in chapter four, chapter five will come out with the main conclusions, policy implications and limitations of this research Structural transformation process is transformation process between sectors in an economy such as the transformation between agriculture, industrial and service sector through time or through development (GDP or GDP per capita) Agriculture sector covers forestry, fishing, hunting and agriculture as a whole; Industrial sector comprise mining, quarrying, manufacturing, construction, electricity, gas, water; Service sector includes all service activities, such as transportation, logistics, communication, whole sale, retail, banking, insurance, real estate, public administration, defense and others services Labor productivity in service sector 16,000 l 14,000 : 12,000 ~ > ~ c II) 8,000 Cl) 6,000 4,000 Cl) ~ en ::J 10,000 2,00~ j • co "'"' , • -, ., It I I co t- "'"' "' "' • I I "'"' "' 0 N 0 N ~ • • N 0 N C") 0 N • 'V 1.0 0 N • _ ,_Series - Series2 • I 0 N M' It , , , , - It' • I co 0 N r0 N co 0 N "' 0 N • Series3 .,_ Series4 16,000 14,000 ftl ~ 12,000 Cll ~ 10,000 ~ 8,000 ~ 4,000 ! 6,000 ! :l 2,000 co a> a> t- a> a> a> a> "' a> a> 0 0 N N ~ I• N 0 N 1.0 'V 0 N N N C") MYS THAD A-ll D VNM co 0 N t0 N 0 N "' 0 N I Figure 17: Labor productivity in service sector of Vietnam, Malaysia, Thailand and the Philippines Source: Author's calculation and draw from data of World Bank, 2012 We see all the three sectors of agriculture, industry, and services of Vietnam are less efficient than Malaysia, Thaland and the Philippines One question posed is that in these three sectors in Viet Nam, which sector is the least effective? Table 66 and figure 18 below show us that in these three sectors, agriculture is the least effective, with labor productivity in 2009 was US$ 793 per person per year, followed by the service sector with US$ 2,636 per person per year and the most efficient in the three sectors is the industry with US$ 3,892 per person per year 1996 264 1997 279 1,782 1,353 1998 277 1,947 1,222 1999 278 2,047 1,241 2000 283 2,235 1,310 2001 280 2,115 1,348 2002 300 2,119 1,337 2003 336 2,146 1,417 2004 377 2,312 1,533 2005 435 2,657 1,599 2006 507 2,642 1,737 2007 567 3,227 1,998 2008 785 3,811 2,466 2009 793 3,892 2,636 Source: Author's calculation from data of World Bank, 2012 Before moving on to Chapter 5, I would like to summarize the process of economic structural transformation of Vietnam compared to Malaysia, Thailand, and the Philippines over the main points in the section 4.2.3 as follows: (1) the share of agriculture in GDP of Vietnam is still high and is the highest in the four countries The share of services in GDP of Vietnam is always the lowest in the four studied countries; (2) The rate of labor distribution in the agricultural sector of Vietnam is very high compared to Malaysia, Thaland, and the Philippines and in the opposite direction, the rate of labor in services of Vietnam is very low compared to Malaysia, Thailand, and the Philippines; (3) labor productivity in all three sectors of Vietnam are lower than Malaysia, Thailand, and the Philippines but the most inefficient is agricultural sector, followed by the service and industrial 67 Sectoral labor productivity of Vietnam 4,500 4,000 ca 3,500 Cll >- Cll 3,000 1: 2,500 a I!! 2,000 Cll Cll 1,500 ~ 1,000 - -&- a a t/) :::J 500 - &- co en en I'- en en -&- •1& -·-~ co en en en en en -·-·- -· • 0 N IL - I 00 N N •Agr '" •