The effect of demographic bonus on economic growth in vietnam and 5 selected countries

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM-NETHERLANDS PROGRAMME FOR MASTER IN DEVELOPMENT ECONOMICS THE EFFECT OF DEMOGRAPHIC BONUS ON ECONOMIC GROWTH IN VIETNAM AND SELECTED COUNTRIES By BUI THAO VY Academic supervisor Dr NGUYEN TRONG HOAI This paper was submitted in partial fulfillment of the requirements for Master’s degree in Development Economics Ho Chi Minh City, November 2013 ACKNOWLEDGEMENTS First off, I would like to thank the entire VNP’s lecturers for their profound knowledge, inspiring spirit and enthusiasm in teaching process Especially, I would like to send my most extreme gratitude to Dr Nguyen Trong Hoai for sharing his professional understanding, perceptive guidance, precious advice and elaborate comments Besides that, I would like to thank Dr Nguyen Thanh Tra and Dr Luca Tasciotti for their valuable recommendations in the early stage of Thesis Research Design I would like to express my special thanks to my classmates in MDE17, who contributed a delighted academic atmosphere and supported me a lot in the learning process I feel very lucky when being acquainted and shared unforgettable memories with all of you I also would like to thank all staff in VNP office for their warm-hearted assistance Most of all, I would like to thank my parents and my husband for their encouragement and affectionate care ABSTRACT Demographic change influences to both economic and society at different aspects, especially in the demographic bonus period These changes are not simple in creating the shift in total population, the age structure but also establishing the new working age cohort Therefore, the role of demographic in economic growth and social stability could not be denied The purpose of this thesis is to access the effects of demographic bonus to economic growth and to investigate the gap between countries at different demographic bonus stage The subjects used in this paper include Vietnam and five collective countries in East and Southeast Asia This thesis identifies the factors of demographic bonus that affect to economic growth using panel data of East and Southeast Asian countries in the period 1995-2010 through fixed effect and panel least squared method The demographic bonus dummy variable is also taken into account in this paper in order to examine the gulf between countries have experience in this period and countries have not yet confronted with this unique stage of demographic history It is found that young dependency ratio and labor participants rate have a strong impact on economic growth In addition, all three channels that demographic bonus creates benefit have influence to the economic growth, especially the channel of human capital Dummy variable is also explored that have a significant meaning in the regression model This proves that there is a difference in income between countries at distinguishes stage of demographic bonus Key words: Demographic bonus; panel data; fixed effects; dummy variable; East and Southeast Asia; Vietnam TABLE OF CONTENTS ACKNOWLEDGEMENT…………………………………………………………………………………2 ABSTRACT……………………………………………………………………………………………….3 CHAPTER 1: INTRODUCTION 1.1 Problem statement………………………………………………………………………………… 1.2 Research Objectives……………………………………………………………………………… 10 1.3 Research Questions……………………………………………………………………………… 10 1.4 Justification of the thesis………………………………………………………………………… 11 1.5 Organization of the thesis………………………………………………………………………….11 CHAPTER 2: LITERATURE REVIEW FOR DEMOGRAPHIC BONUS 2.1 Key concepts……………………………………………………………………………………… 13 2.2 Theoretical literature……………………………………………………………………………… 14 2.3 Conceptual framework…………………………………………………………………………… 16 2.4 Empirical literature………………………………………………………………………………….19 2.5 Chapter remarks…………………………………………………………………………………….27 CHAPTER 3: DEMOGRAPHIC TRANSITION IN EAST ASIA AND VIETNAM, DATA AND METHODOLOGY 3.1 Demographic in East Asia and Vietnam………………………………………………………….29 3.1.1 East and Southeast Asia……………………………………………………………………… 29 3.1.2 Vietnam……………………………………………………………………………………………32 3.2 Data………………………………………………………………………………………………… 34 3.3 Analytical framework……………………………………………………………………………….35 3.4 Research methodology…………………………………………………………………………….36 3.5 Chapter remarks…………………………………………………………………………………….44 CHAPTER 4: FINDINGS AND DISCUSSIONS 4.1 Descriptive statistical analyses for demographic bonus……………………………………… 45 4.2 Empirical results…………………………………………………………………………………….46 4.3 Chapter remarks…………………………………………………………………………………….50 CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS 5.1Conclusion……………………………………………………………………………………………51 5.2 Policy implications………………………………………………………………………………… 52 5.3 Limitations and directions for further studies…………………………………………………….54 5.3.1 Limitations…………………………………………………………………………………………54 5.3.2 Directions for further studies…………………………………………………………………….55 REFERENCES………………………………………………………………………………………… 56 APPENDICE…………………………………………………………………………………………… 62 LIST OF TABLE Table 2.1: Summary of empirical studies……………………………………………………………24 Table 3.1: Vietnamese age structure, 1979-2009………………………………………………… 33 Table 3.2: Vietnamese population projection, 2010-2050………………………………………… 33 Table 3.3: Data sources……………………………………………………………………………….34 Table 3.4: Variables’ expected signs…………………………………………………………………43 Table 4.1: Data descriptive statistics…………………………………………………………………45 Table 4.2: Estimation results………………………………………………………………………… 48 LIST OF FIGURE Figure 2.1: Relationship between demographic bonus and economic growth………………… 17 Figure 3.1: Share of Working-age population in East Asia and selected countries…………… 31 Figure 3.2: Economic growth in selected countries………………………………………………32 ABBREVIATION CPI: Corruption perceptions index DB: Demographic bonus GDP: Gross domestic products HDI: Human development index IMR: Infant mortality rate IV: Instrumental variables OLS: Ordinary least squares UN: United Nations UNFPA: United Nations Population Fund TFR: Total fertility rate TI: Transparency International TLS: Two stage least squares WB: World Bank WDI: World development indicators Chapter 1: Introduction 1.1 Problem statement The transition of population age structure is one of the top concerns of not only demographers but also the economists all over the world because many direct and indirect relationships between demographic factors and economic growth will contribute to form the prosperity and the wealth of a nation The shift in age structure will be different from country to country and different from time to time Many developed countries in Western Europe and North America reached their demographic bonus in late 19th and early 20th century ( Lindh and Malmberg, 1999) and this period also could be seen as the noticeble mark in their process of motivate economic growth Adversely, some countries in Asia and Africa could not exploit the ‘real bonus’ from demographic bonus period and this problem become an encumbrance in their way of economic development Therefore, the effect of demographic bonus on economic growth is ambigous if countries which have experience in this period not have a right combination of appropriate policies This issue is mentioned in Bloom and Canning (2001) that demographic bonus is not automatically come with free bonus With the smoothly co-ordination of social and economical issues in the right policies, demographic can accelerate the economic growth through the channels of public health, education and economic policies that foster the labor market, trade openness and capital accumulation from savings Some countries in East Asia which have experienced the demographic bonus period and succeeded in alleviating poverty problem (Tahir, 2011) could be lessons for Vietnam in the process of population transition and economic growth According to data and calculation from the United Nations Population Fund (UNFPA), Vietnam now is in the period of demographic bonus This period will last within 30 years in average and is considered as a unique event in the long demographic history of a given country As a result, Vietnam should afford in making suitable policies, governor management ability and coordinating between different parts of economy to take benefit from this rare period Besides, lessons from the previous successful countries in experiencing the demographic bonus period could be taken into account The early and recently researches on the relationship between demographic factors and economic growth both use variety of methods and they also lead to different results However, the proportion of studies which support the effect of demographic factors, especially demographic bonus on economic growth take a larger part than the contrary studies and the familiar methods used in these papers are descriptive statistic or econometrics method Thanks to the heritance of the previous studies, this paper examine the effect of demographic factors on economic growth especially in the period of demographic bonus in East Asia and test whether there is any difference in countries which experienced demographic bonus with countries without demographic bonus In addition, the effect of demographic policy on economic growth in the bonus period aslo put into consideration After having draw the impact of demographic factors and policies on economic growth, the policies and lessons for Vietnam will be implemented 1.2 Research objectives The specified objectives of the study are to (i) Examine the effects of demographic factors on economic growth in selected countries included Vietnam cover the period from 1995 to 2010 (ii) Test the difference between the countries which has experienced in the demographic bonus period and the countries without this period (iii) Draw some policy implications that Vietnam could learn from the previous successful countries 1.3 Research questions This thesis is intended to deal with the main research question is “What is the effects of demographic bonus on economic growth?” In order to answer the main question, two subquestions will be employed elaborately (i) Does age structure significantly impact to economic growth? and (ii) Do demographic bonus and its channels affect to economic growth simultaneously? The scope of the paper will be limited in using the data of selected countries in period 19952010 to examine the effect of demographic bonus to economic growth However, this collection 10 ranges from health, population, labor and financial markets to human capital (Bloom, Canning and Sevilla, 2001 and Phang, 2006) Health policies should be popularly applied for each age group in population from infants, children, working age to aging people Simultaneously, these policies are also needed to concentrate to both sexes, female and male, and utilize for both rich and poor people in whom female and the poor are the most important subjects Women’s health takes a crucial role not only in the reproductive health after pregnancy period but also in taking care for other family members Health of the poor sections also plays as a key driver for economic growth because these spectrums are always the most vulnerable groups in society Besides that, the income of poor people would be improved if the burdens of health problems are cut down Population policies in which family planning is the most noticeable program are other indispensable strategies In the early stage of demographic bonus, the family planning is aimed to reduce the fertility rate, thus the number of children per household will decrease Finally, in turn, parents will concentrate to take care of fewer children and the quality of health and education is upgraded This will influence to society in many aspects including human capital and standard of living In another hand, the impact of overwhelming economic growth on social problems such as declining in marriage rates, increasing in divorce rates should be taken into account Labor force in demographic bonus period which has higher quality in health and education is needed to absorb in the development of economic and society Supplying more jobs for this labor force is the combination of an open economy, flexibility of labor market and the improvement in institutions management Developing countries in general and Vietnam in specific could create more jobs through export channel This plan not only solve the problem of nation’s output but also boost the economic growth via sub-channels such as foreign investment attraction, foreign currency reserve, and technological exchange Flexibility of labor market enquires the dynamic adaptation of both employers and employees Through that, employers 53 could easily adjust labor force from certain area to the new one when market changes rapidly and employees also get accustomed with changes in business environment Minimum wage and labor protection policies must have more attention from policy makers Encouraging savings in the demographic bonus would have positive effect to economic growth if this source of capital accumulation is productively allocated to investment In order to take advantage of savings in this stage of demographic transition, governments have to keep the stability in price with low inflation and safety in financial market This condition comes from effective and transparent financial institutions Human capital is a key characteristic in most successful countries which take the utmost advantage from demographic bonus Investing in education must be implemented for all levels, especially higher education The reason for this comes from the fact that demographic bonus accompanied with declining in fertility rates so demand for lower education will fall and governments should invest more in tertiary or higher education to create a quality labor force This high quality workforce could adapt easily the change in technology and society Finally, developing countries could escape from the cheap and low quality labor situation Future policies for aging population are needed to prepare from the early stage of demographic bonus When young and working age generation becomes old, total number of aging population is extremely huge with a long life expectancy This result creates burdens in retirement and pension policies The preparation for a effective pension and health care system is very important in the near future 5.3 Limitations and directions for further studies 5.3.1 Limitations The thesis aims to examine the effect of demographic factors on economic growth and to test the difference between countries at different stages of demographic The scope of the study is limited by data collected just cover from 1995 to 2010 and the one way effects of three channels 54 including labor supply, human capital and savings to economic growth In addition, the difference in income between Vietnam and a specific successful demographic bonus country is needed to consider in more detail The method used in this paper is fixed effects and panel least squared could lead to robust results because of lacking in reliable references sources for instrument variables of demographic factors 5.3.2 Further studies The further studies could be considered when expanding time period to the year before 1995, thus the trend of demographic bonus would be illustrated more exact and comprehensive In addition, the study about difference between income level and a specific successful demographic bonus such as Korea could be tested through difference-in-difference approach in order to take a shorter sight in the gap between two countries and extract lessons for Vietnam Besides that, if having a reliable reference sources for instrument variables of demographic factors, the causality effect could be examined through two stage least squared and give better results 55 REFERENCES Barro, R (1991) Economic Growth in a Cross Section of Countries Quarterly Journal of Economics, Vol.106, pp.223-51 Barro, R and Lee, J (1992) Economic growth Havard University Barro, R.J & Sala - i - Martin, X (2004) Economic Growth (2ed) Cambridge: MIT Press Bloom, D.E et al (2000) From Demographic Lift to Economic Lift off: The Case of Egypt Paper presented at the conference for growth beyond stabilisation: 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(2003) Rising Longevity, Education, Savings, and Growth Journal of Development Economics, 70(1), 83-101 61 APPENDICES Appendix 1: Model with fixed effects Dependent Variable: LNGDPPC Method: Panel Least Squares Date: 12/02/13 Time: 15:04 Sample: 1995 2010 Periods included: 16 Cross-sections included: Total panel (unbalanced) observations: 95 Variable Coefficient Std Error t-Statistic Prob C CPI LNPOPG SAV TRADE 3.901037 0.448133 -0.255371 0.050575 0.003835 0.448673 0.097385 0.087793 0.005966 0.001189 8.694606 4.601663 -2.908771 8.476669 3.224307 0.0000 0.0000 0.0046 0.0000 0.0018 Effects Specification Cross-section fixed (dummy variables) R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) 0.972318 0.969387 0.254317 5.497549 0.555630 331.7321 0.000000 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter Durbin-Watson stat 8.021389 1.453523 0.198829 0.467658 0.307456 0.961766 Appendix 2: Likelihood ratio test for fixed effects Likelihood ratio test Redundant Fixed Effects Tests Equation: Untitled Test cross-section fixed effects Effects Test Cross-section F Cross-section Chi-square Statistic 83.206642 168.532007 Cross-section fixed effects test equation: Dependent Variable: LNGDPPC Method: Panel Least Squares 62 d.f Prob (5,85) 0.0000 0.0000 Date: 12/03/13 Time: 17:46 Sample: 1995 2010 Periods included: 16 Cross-sections included: Total panel (unbalanced) observations: 95 Variable Coefficient Std Error t-Statistic Prob C CPI LNPOPG SAV TRADE 5.827348 0.823120 -0.575432 -0.017273 -0.004606 0.251949 0.071720 0.144440 0.008793 0.001566 23.12907 11.47685 -3.983882 -1.964337 -2.940482 0.0000 0.0000 0.0001 0.0526 0.0042 R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) 0.836828 0.829576 0.600050 32.40535 -83.71037 115.3916 0.000000 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter Durbin-Watson stat 8.021389 1.453523 1.867587 2.002001 1.921900 0.225746 Appendix 3: Model with fixed effects Dependent Variable: LNGDPPC Method: Panel Least Squares Date: 12/02/13 Time: 15:11 Sample: 1995 2010 Periods included: 16 Cross-sections included: Total panel (balanced) observations: 96 Variable Coefficient Std Error t-Statistic Prob C CPI LABOR LNDEP1 SAV TRADE 20.79280 0.570354 0.051540 -5.501682 0.018759 -0.003613 2.252577 0.057202 0.025974 0.503679 0.005075 0.001064 9.230671 9.970878 1.984330 -10.92299 3.696465 -3.396903 0.0000 0.0000 0.0504 0.0000 0.0004 0.0010 Effects Specification Cross-section fixed (dummy variables) R-squared Adjusted R-squared S.E of regression 0.987816 0.986383 0.170408 Mean dependent var S.D dependent var Akaike info criterion 63 8.042309 1.460309 -0.593771 Sum squared resid Log likelihood F-statistic Prob(F-statistic) 2.468310 39.50100 689.1418 0.000000 Schwarz criterion Hannan-Quinn criter Durbin-Watson stat -0.299939 -0.474999 0.937273 Appendix 4: Tests for fixed effects Likelihood ratio test Redundant Fixed Effects Tests Equation: Untitled Test cross-section fixed effects Effects Test Statistic Cross-section F Cross-section Chi-square d.f Prob 22.187482 80.173825 (5,85) 0.0000 0.0000 Cross-section fixed effects test equation: Dependent Variable: LNGDPPC Method: Panel Least Squares Date: 12/03/13 Time: 17:50 Sample: 1995 2010 Periods included: 16 Cross-sections included: Total panel (balanced) observations: 96 Variable Coefficient Std Error t-Statistic Prob C CPI LABOR LNDEP1 SAV TRADE 31.68911 0.387436 -0.065573 -5.806890 -0.012201 -0.002030 1.322455 0.041330 0.007584 0.404088 0.005274 0.000644 23.96234 9.374305 -8.646685 -14.37034 -2.313619 -3.149064 0.0000 0.0000 0.0000 0.0000 0.0230 0.0022 R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) 0.971914 0.970354 0.251436 5.689815 -0.585915 622.8961 0.000000 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter Durbin-Watson stat Appendix 5: Model regression results Dependent Variable: LNGDPPC Method: Panel Least Squares 64 8.042309 1.460309 0.137207 0.297478 0.201991 0.495638 Date: 12/02/13 Time: 15:08 Sample: 1995 2010 Periods included: 16 Cross-sections included: Total panel (balanced) observations: 96 Variable Coefficient Std Error t-Statistic Prob C CPI LABOR LNDEP2 SAV TRADE 15.53926 0.582807 0.045700 -3.503792 0.019561 -0.003366 2.108150 0.059431 0.026878 0.342985 0.005272 0.001102 7.371043 9.806454 1.700256 -10.21558 3.709986 -3.053663 0.0000 0.0000 0.0927 0.0000 0.0004 0.0030 Effects Specification Cross-section fixed (dummy variables) R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) 0.986854 0.985307 0.177009 2.663233 35.85266 638.0812 0.000000 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter Durbin-Watson stat 8.042309 1.460309 -0.517764 -0.223932 -0.398992 0.897705 Appendix 6: Model regression results Dependent Variable: LNGDPPC Method: Panel Least Squares Date: 12/02/13 Time: 15:11 Sample: 1995 2010 Periods included: 16 Cross-sections included: Total panel (balanced) observations: 96 Variable Coefficient Std Error t-Statistic Prob C CPI YOUTHDEP OLDDEP SAV TRADE 9.355580 0.412332 -0.128703 -0.025860 0.023860 -0.004036 0.734144 0.081796 0.015085 0.042230 0.005415 0.001141 12.74352 5.040950 -8.532064 -0.612360 4.405960 -3.537190 0.0000 0.0000 0.0000 0.5419 0.0000 0.0007 Effects Specification Cross-section fixed (dummy variables) R-squared Adjusted R-squared S.E of regression 0.986849 0.985302 0.177040 Mean dependent var S.D dependent var Akaike info criterion 65 8.042309 1.460309 -0.517408 Sum squared resid Log likelihood F-statistic Prob(F-statistic) 2.664181 35.83557 637.8510 0.000000 Schwarz criterion Hannan-Quinn criter Durbin-Watson stat -0.223576 -0.398636 0.906617 Appendix 7: Model regression results Dependent Variable: LNGDPPC Method: Panel Least Squares Date: 12/02/13 Time: 15:18 Sample: 1995 2010 Periods included: 16 Cross-sections included: Total panel (balanced) observations: 96 Variable Coefficient Std Error t-Statistic Prob C CPI HDI LNLIFE LABOR LNDEP1 SAV TRADE 14.80655 0.481637 2.815481 0.331751 0.046876 -4.559938 0.015129 -0.004093 8.534641 0.070145 1.010798 1.863862 0.026578 0.664015 0.005282 0.001026 1.734876 6.866301 2.785405 0.177991 1.763715 -6.867226 2.864246 -3.987918 0.0865 0.0000 0.0066 0.8592 0.0815 0.0000 0.0053 0.0001 Effects Specification Cross-section fixed (dummy variables) R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) 0.989171 0.987606 0.162574 2.193724 45.16180 631.8294 0.000000 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter Durbin-Watson stat Appendix 8: Model regression results Dependent Variable: LNGDPPC Method: Panel Least Squares Date: 12/02/13 Time: 15:21 Sample: 1995 2010 Periods included: 16 Cross-sections included: Total panel (balanced) observations: 96 66 8.042309 1.460309 -0.670037 -0.322782 -0.529671 0.847951 Variable Coefficient Std Error t-Statistic Prob C CPI HDI LIFE LABOR SAV TRADE DUM 5.955951 0.101652 6.638066 0.011994 -0.073923 0.011234 0.000956 0.336636 1.061669 0.050640 1.417537 0.019620 0.013842 0.005037 0.000769 0.105955 5.609990 2.007342 4.682816 0.611303 -5.340607 2.230508 1.244162 3.177146 0.0000 0.0478 0.0000 0.5426 0.0000 0.0283 0.2167 0.0021 R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) 0.973401 0.971285 0.247455 5.388607 2.024839 460.0586 0.000000 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter Durbin-Watson stat 67 8.042309 1.460309 0.124483 0.338178 0.210862 0.552895 ... in countries which experienced demographic bonus with countries without demographic bonus In addition, the effect of demographic policy on economic growth in the bonus period aslo put into consideration... the cofficients from their best model to calculate the contribution of the growth of the working-age shate, growth of the labor force and growth of the population to economic growth in Asia Their... unsuccessful countries in the demographic bonus period 1.4 Justification of the thesis This thesis attempts to embrace the effect of demographic factors, especially demographic bonus on economic growth