The determinants of economic growth, a case study of six southeast asian countries

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ISS-INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM- NETHERLAN DS PROGRAMME FOR MASTER’S DEGREE IN DEVELOPME NT ECONOMICS THE DETERMINANTS OF ECONOMIC GROWTH: A CASE STUDY OF SIX SOUTHEAST ASIAN COUNTRIES SUPERVISOR : PRESENTED BY : DR NGUYỄN MINH ĐỨC NGUYỄN KIỀU GIANG MDE-K16 HO CHI MINH CITY, DECEMBER 2012 ACKNOWLEDGMENT I’ve experienced the great time in this course with acquire academic knowledge, open-mind to approach new things, and be straightforward to express ideas I’ve guided by open-mind lecturers who always encourage us to express our opinions and discuss it This is really quality and extensive course We’re encouraged to be ourselves and be self-confident to discuss ideas, it’s really meaningful thing Sincerely, I would like to take this opportunity to express my honest thanks to the Vietnam-Netherlands Master Program for Economics of Development for the interesting and extensive curriculum, as well as sincere thanks to all of people who engage in this course such as management board of this program, lecturers, tutors To fulfill this course, I’ve received the help and support from many people such as director and vice director of this program, lecturers, tutors, my supervisor, classmates, friends, course administrators, librarians of MDE & Fulbright, and other people who give me the instructions, comments, advices, supports, sympathies, and encouragement during the course process Without these things, I could not fulfill the Thesis and finish the course First of all, I would like to express my gratitude to my supervisor – Dr Nguyen Minh Duc, who always remind me to finish the Thesis timely and make me determine to finish the Thesis with high effort, very patient and sympathy with me for delaying the time of submitting Thesis, spent his valuable time to help me, give comments and correct the Thesis mistake by mistake From bottom of my heart, I sincerely thank him for all I would like to express my special thank to Dr Nguyen Trong Hoai - Director of the Program, Vice Principal of UEH He fosters us to study and finish the course actively and efficiently, take care of us step by step And special thanks to Dr Pham Khanh Nam steps with us to overcome obstacles in thesis process honestly, give us the valuable advices and encouragement to finish the thesis i Thanks to TRD board defense give me valuable comments and advices to continue this topic Thanks to Dr Phan Minh Ngoc supplies me materials at my TRD time Thanks to Dr Le Dinh Truc gives me valuable comments and advice on panel technique in Eview And thanks to tutor Phung Thanh Binh for helping us honestly in the course Thanks to all classmates in MDE-K16, all of you support me unconditionally with discussions, talks, shared materials, team working playing, and other Thanks to friends Thu Huyen and Thanh Tien, your sharing materials are very useful for me Hope all of you fulfill this course and get success in your life Lastly, I would like to thank to my dear family, warm friends that supports and sympathies with me for spending most time on studying this course Thanks all for all, hope you will be happy and successful in life I pledge to take full responsibilities for mistakes, errors, omissions and shortcomings of the study ii ABTRACT This study based on the neoclassical growth theory, an extended version of this model As common trend, Cobb-Douglas production function is used to evaluate the robustness of determinants of economic growth in a dataset of six Southeast Asian countries from 1993 to 2009 The fixed effect model (FEM) is used to estimate this model The results indicate that the most important source of economic growth of these countries is capital accumulation and labor Keywords: Economic growth, determinants, Capital, Labor, Population growth, Government expenditure, Southeast Asian countries, Neoclassical Model, CobbDouglas production function, FEM iii TABLE OF CONTENT CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research structure CHAPTER 2: RESEARCH OBJECTIVES & RESEARCH QUESTIONS 2.1 Research objectives 2.2 Research questions 2.3 Research scope 2.4 Research contribution CHAPTER 3: LITERATURE REVIEW 3.1 General Overview 3.1.1 3.1.2 3.1.3 3.1.4 Overview of economic development theory 3.1.4.1 Classify theories by time Classical theory Neoclassical model Endogenous Theory 3.1.4.2 Classify theory by four main classes Linear stages of growth theory Structural change theory International dependence theory Neoclassical counter revolution theory 3.2 Theoretical Framework 3.2.1 Production function Cobb-Douglas 3.2.2 Harrod-Domar Growth Model 3.2.3 Neoclassical model-Solow model 3.2.4 Capital Fundamentalism iv 3.3Empirical Review CHAPTER 4: RESEARCH METHODOLOGY 4.1Analyzed Framework 4.2Variables 4.3Data Description - Data c CHAPTER 5: DATA ANALYSIS AND DISCUSSION 5.1Descriptive Statistics Ana 5.2Econometric Analysis 5.3The limitations of data, an CHAPTER 6: CONCLUSION AND POLICY RECOMMENDATION 6.1Main findings 6.2Managerial Implications a 6.3Limitations and future res REFERENCE APPENDICES v APPENDICES A: Data of GDP, Capital, Population growth, Labor, Government expenditure 70 B: Descriptive statistics of each country 77 C: Correlation Matrixes of each country 79 D: Residual Graph 81 E: Regression Results 82 F: Main Empirical studies Summary 92 E: Regression results 81 vi LIST OF TABLES Table 3.1: Sources of Growth in East Asia, by Country and Period 37 Table 4.1 Estimated Capital-Output ratio some Asian Countries 1980 45 Table 4.2 Range forecast of COR for countries 46 Table 4.3 Summary of variable 49 Table 5.1 Sample observations - Descriptive statistics - sample: 1993 2009 54 Table 5.2 Correlation on the sample observations 54 Table 5.3 Model - A comparison of results with FEM 55 Table 5.4 HAUSMAN TEST for MODEL 55 Table 5.5 Model - A comparison of results with FEM 57 Table 5.6 HAUSMAN TEST for MODEL 57 Table 5.7 Estimated results for FEM with tradition model (Model 1) 58 Table 5.8 Estimated results for FEM with extended model (Model 2) 60 vii LIST OF FIGURES Figure 3.1: Population of 1993 of countries Figure 3.2: Population of 2009 of countries Figure 3.3: GDP per capita of 1993 of countries 10 Figure 3.4: GDP per capita of 2009 of countries 10 Figure 4.1: Conceptual Framework of the study 39 Figure 5.1: GDP per capita of countries for the period of 1993-2009 52 Figure 5.2: Capital per capita GDP per capita for the period of 1993-2009 53 Figure 6.1: An overview of determinants of economic growth of countries 64 viii ABBREVIATIONS COR : Capital output ratio DCs : Developed (high-income) countries FEM : The fixed effects method GCF : Gross Capital Formation GFCF : Gross fixed assets formation GDP : Gross Domestic Product ICOR : Incremental capital output ratio LDCs : Less developing countries LICs : Low-income countries LSDV : The least-squares dummy variable OLS : Ordinary Least Square PCI : Province Competitiveness Index REM : Random Effect Model ix * REM Regression Results Table E.9: REM Regression Result of Model – Traditional model, Capital Series No.1 Dependent Variable: LOG(GDP?/LABOR?) Method: Pooled EGLS (Cross-section random effects) Sample: 1993 2009 Included observations: 17 Cross-sections included: Total pool (balanced) observations: 102 Wansbeek and Kapteyn estimator of component variances Variable Coefficient Std Error t-Statistic Prob C 2.7156500.3988666.8084340.0000 LOG(CAPITAL01?/LABOR?)0.6178730.03623517.052010.0000 Random Effects (Cross) _VN C-0.455981 _TL C _IN C _PH C _MA C _SG C Cross-section random Idiosyncratic random R-squared Adjusted R-squared S.E of regression F-statistic Prob(F-statistic) R-squared Sum squared resid 88 Table E.10: REM Regression Result of Model – Traditional model, Capital Series No.2 Dependent Variable: LOG(GDP?/LABOR?) Method: Pooled EGLS (Cross-section random effects) Date: 11/28/12 Time: 08:48 Sample: 1993 2009 Included observations: 17 Cross-sections included: Total pool (balanced) observations: 102 Swamy and Arora estimator of component variances Cross-section SUR (PCSE) standard errors & covariance (no d.f Correction) Variable C LOG(CAPITAL02?/LABOR?) Random Effects (Cross) _VN C-0.685629 _TL C-0.254360 _IN C-0.300456 _PH C-0.224779 _MA C0.420695 _SG C1.044529 Coefficient Std Error t-Statistic 3.7440190.33530211.166120.0000 0.5173580.03275315.795820.0000 Cross-section random Idiosyncratic random R-squared Adjusted R-squared S.E of regression F-statistic Prob(F-statistic) R-squared Sum squared resid 89 Prob Table E.11: REM Regression Result of Model – Extended model, Capital Series No.1 Dependent Variable: LOG(GDP?/LABOR?) Method: Pooled EGLS (Cross-section random effects) Sample: 1993 2009 Included observations: 17 - Cross-sections included: Total pool (balanced) observations: 102 Wansbeek and Kapteyn estimator of component variances Variable Coefficient Std Error C t-Statistic 2.6560890.4258316.2374180.0000 LOG(CAPITAL01?/LABOR?)0.6078360.04377113.886880.0000 GOVEXP_GDP?0.8904690.8552531.0411770.3004 LOG(POP_GROWTH?)-0.0159140.039787-0.3999660.6901 Random Effects (Cross) _VN C-0.448404 _TL—C-0.364902 _IN—C-0.231585 _PH—C-0.147043 _MA—C0.339061 _SG—C0.852874 Cross-section random Idiosyncratic random R-squared Adjusted R-squared S.E of regression F-statistic Prob(F-statistic) R-squared Sum squared resid 90 Prob Table E.12: REM Regression Result of Model – Extended model, Capital Series No.2 Dependent Variable: LOG(GDP?/LABOR?) Method: Pooled EGLS (Cross-section random effects) Sample: 1993 2009 Included observations: 17 Cross-sections included: Total pool (balanced) observations: 102 Wansbeek and Kapteyn estimator of component variances Variable Coefficient Std Error C t-Statistic 4.1796360.35390011.810230.0000 LOG(CAPITAL02?/LABOR?)0.4701570.02277120.647530.0000 Random Effects (Cross) _VN—C-0.773605 _TL—C-0.243428 _IN—C-0.334809 _PH—C-0.265479 _MA—C0.463174 _SG—C1.154147 Cross-section random Idiosyncratic random R-squared Adjusted R-squared S.E of regression F-statistic Prob(F-statistic) R-squared Sum squared resid 91 Prob APPENDIX F: Main Empirical Studies Summary Table F.1: Main Empirical Studies Summary Ord Authors No Objectives Ab Wahab Muhamad (2004), “Total Factor Productivity Growth Survey Report-Malaysia” P210-232 TFP growth and its sources in the Malaysian economy from 1981 to 2001; identify the factors affecting TFP growth at the national level Achara Chandrachai & Tubtimtong Bangorn & Kanjana Chockpisansin (2004), “Total Factor Productivity Growth Survey Report-Thailand”, p297-321 Calculate the TFP from the energy crisis (1977-81), beginning of the expansion period (1982-86), boom period (1987-91), declining period (1992-96), and recession period after the financial crisis (1997-99) Caesar B Cororaton (2004), “Total Factor - Quantify TFP growth and its contribution to Productivity Growth Survey Report-Philippines, overall economic growth - understand the 92 p-255-279 Laurits R Christensen, Dianne Cummings, and Dale W Jorgenson 1980 “Economic Growth, 1947-73; An International Comparison” Le Thanh Nghiep, Huu Quy (2000) “Impact Of DoiMoi” possible factors that might have caused changes in TFP growth - International comparison of postwar patterns of aggregate economic growth - Assess the role of growth in real capital input and in real labor input in accounting for aggregate economic growth The effect of Doi Moi on Vietnam's GDP 93 N Gregory Mankiw, David Romer and David N Weil (1992) “A contribution to empirics of economic growth” Nombulelo Duma (2007) “Sri Lanka's Sources of Growth” Phan Minh Ngoc (2006) “The Role of Capital and Technological Progress in Vietnam’s Economic Growth” - Examines whether the Solow growth model is consistent with the international variation in the standard of living - Examines implications of Solow model for convergence in standards of living: whether poor countries tend to grow faster than rich countries Assess Sri Lanka’s sources of growth Measure the contribution of Capital, Labor and Technological Progress to Economic Growth 94 Phan Minh Ngoc (2007), “Sources of Vietnam’s Economic Growth” 10 Rober J Barro, 1988 “Government Spending in a Simple Model of Endogenous Growth” Robert J Barro, 1989 “A cross - country study of growth, saving and government” 11 12 - Measures the contribution of capital formation, labor, and technological progress to the economic growth - The impact of Doimoi on economic growth Figure out relation between growth rate GDP per capita & government consumption expenditure per GDP Robert J Barro, 1994 “Democracy and Growth” 95 13 Robert J Barro & Jong Wha Lee, 1993 “Losers and Winners in Economic Growth” Sources of growth 14 Robert J Barro (1996)“Determinants of Economic GrowthA Cross-Country Empirical Study” Measure the contribution of factor to Economic Growth 96 15 Robert J Barro, 2001 “Economic Growth in East Asia Before and After the Financial Crisis” One objective is to assess whether the Asian financial crisis had a long lasting effect on growth prospects and other dimensions of economic performance for the two groups of Asian economies 16 Shandre Mugan Thangavelu (2004), ”Total Factor Productivity Growth Survey Report-Singapore” The importance of productivity growth will be an important component of longterm growth in the East and Southeast Asian countries as they structurally adjust toward higher value-added production 17 Susan M Collins and Barry Establishing which as below is correct 97 P.Bosworth (1996) ”Economic Growth in East AsiaAccumulation versus Assimilation” is a crucial first step in extracting appropriate lessons from East Asian growth experiences: (1) Asian growth the maintenance of high rates of physical and human capital accumulation over a number of decades a willingness to make the sacrifices of current consumption necessary to invest for the future? (2) Or has the key been the less costly approach of adopting existing technologies from more advanced economies, which may be associated with increased capital accumulation along the way? 98 18 Svetlana Ledyaeva and Mikael Linden, 2008 “Determinants of Economic Growth: Empirical Evidence from Russian Regions” 19 Tran Tho Dat (2004) “Total Factor Productivity Growth Survey Report-Vietnam”, P322-350 focuses mainly on TFP and its determinants 20 Yan Wang, Yudong Yao - Investigating the determinants of 99 (2001) “Sources of China's economic growth, 1952-99incorporating human capital accumulation” China's growth - Shed light on the relative importance of factor accumulation (physical capital, labor and human capital) versus the growth of TFP 100 101 ... macro factors such as financial capital, labor, etc… to economic growth of some Southeast Asian countries including Vietnam, Indonesia, Malaysia, the Philippine, Singapore and Thailand through the. .. constant capital-output ratio The advantage of this method is that we not have a assume anything about the initial capital stock; its weakness is that it assumes a constant capital-output ratio The. .. is constant, but as a matter of fact the growth rate of capital is higher than the growth rate of labor leads to labor shortage, and vice versa Next, the main limitation of this model is assumption: