Structural transformation and economic growth of asia developing countries and vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS STRUCTURA L TRANSFORM ATION AND ECONOMIC GROWTH OF ASIAN DEVELOPIN G COUNTRIES AND VIETNAM S u m m ary version By TRAN THIEN TAI Academic Supervisor: Dr TRAN TIEN KHAI HO CHI MINH CITY, NOVEMBER 2012 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 of World 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 CHAPTER 2: LITERATURE REVIEW 2.1 Theoretical review 2.2 Empirical studies 2.3 Conceptual framework CHAPTER 3: RESEARCH METHOLODOGY 3.1 Data 3.2 Research methodology CHAPTER 4: EMPIRICAL ANALYSIS OF STRUCTRUAL TRANSFORMATION AND GROWTH 4.1 Overview of economic growth of 1985 -2010 4.2 Experimental study result of struc countries during 1985-2010 4.2.1 Result of statistics descriptive model 4.2.2 Result of economestric model 4.2.3 Structural transformation and labor productivity of Vietnam and acomparision with Malaysia, Thailand and the Philippines CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 5.1Conclusions 5.2Recommendations REFERENCES 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 of the 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 and played a key role in economic growth of the world It is useful to analyze what is the structural transformation process of Asian developing countries including Vietnam? 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 1985-2010; (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 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 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 2.1 Theoretical review According to Begg et al (1995), Gross Domestic Pro measured by the formulation: i = gdp ∑ i j=1 va Where: gdpi is GDP of a country in year i vaij is value added of sector j in year i j includes three sectors of an economy: agriculture, industry and service Solow (1962) uses the Cobb-Douglas production function to form up Solow growth model α q =Ak A is multifactor of productivity or technology progress of an economy k is capital per capita of an economy q is output per capita of an economy Equation (2) explains output per capita will be increased significantly once productivity, efficiency or technology change happens to the economy We all know that a market economy tends to allocate resources from less efficient areas to more efficient areas Therefore, this model will support this research of structural transformation in the following sections of this chapter Lewis (1955) develops the two-sector labour surplus model in 1955 In this model, the underdeveloped economy consists of two sectors which are traditional and modern sectors Traditional sector has a surplus of labour while a limited resource of land Its marginal product of labour (MPL) tends to diminish until MPL equal to zero (MPL=0) The proportion of surplus labour in traditional sector will be transferred to the modern sector and makes the modern sector’s output grown The labour transfer process and employment expansion in modern sector continue happening until all of surplus labour in traditional sector is absorbed The twosector labour surplus model provides a basic theory of structural transformation The structural transformation of the economy can take place with the growth of the modern sector and modern industry (industrial and service sector) without reducing agricultural output According to Perkins et al (2006), the Engel’s law was developed by Ernst Engel in the nineteenth century The law states that when household income increases, the proportion of income spent on food decreases This is one reason to explain the decline of agriculture’s share in total production when the GDP per capita increases Another reason comes from the productivity gains in agriculture due to technological change which promotes the process of liberalization of the labour force and allow them joining in non-agricultural sector such as industry and services Kuznets (1971) finds out that developed countries are following up the same process of structural transformation He distinguishes structural transformation into two different phases The first phase is in the beginning of development process, in which an economy allocates most of its resources to agriculture sector As the economy continues to develop, resources are then re-allocated from agriculture to industrial and service sector In the second phase, resources are re-allocated from both agriculture and industrial to service sector 2.2 Empirical studies Bah (2008) analyzes structural transformation of developed countries including nine countries, such as Australia, Canada, France, Germany, Italy, Japan, Sweden, United of Kingdom, and the United States, during the period 1870 -2000 Bah finds that: (1) developed countries follow a homogeneity process of structural transformation; (2) the structural transformation of developed countries is well 2This empirical study will be referred in chapter four and chapter five of this research suited to the one Simon Kuznets mentioned in theoretical review Agriculture declines in both first and second phases of development Industry increases in the first phase of development and decreases in second phase of development Service sector always increases in the first phase and second phase of development; (3) the threshold between first phase and second phase of development is when GDP per capita reach at 8,100 US$ per person; (4) all developed countries are in the second phase of development Bah (2009) explores that beside the thing that structural transformation play a positive role in economic growth, Total Factor Productivity (TFP) of each sector also play an important role in economic growth He uses panel data on sector employment share and GDP per capita of the US, represent for developed country, and Korea, Cameroon, Brazil, represent for developing countries, from 1950 to 2000, to analyze sectoral productivity of developed and developing countries He finds out that relative to the US, developing countries are least productive in agriculture, then followed by services and manufacturing Hoang Kieu Trang (1998) analyzes structural change of Vietnam during 19801997 The paper reveals that (1) the growth rate of non-agricultural sector of Vietnam increases higher than GDP growth rate; (2) structural change, including the declining of agriculture, increasing of industry and services, provides positive impact to economic growth Dekle & Vandenbroucke (2006) investigate how structural transformation impact to economic growth of China from 1978 to 2003 They explore three sectors in China’s economy: agriculture, private non-agriculture, and public (government) non-agriculture sectors by using employment by sector and GDP per sector data The paper discloses that there are three main sources of China’s growth from 19782003: (1) high productivity in private non-agriculture sector; (2) reallocation of labor from agriculture sector to non-agriculture sector, (3) reallocation of labor from public non-agriculture sector to private non-agriculture sector Duarte & Restuccia (2010) examine the role of sectoral labor productivity and the reallocation of labor across sectors to explain the process of structural transformation The authors find that (1) sectoral labor productivity differences across countries are large, both at a point in time and over time In particular, labor productivity differences between developed and developing countries are large in agriculture and services and smaller in industry; (2) over time, productivity gaps between developed and developing countries have been substantially narrowed down in agriculture and industry but not really as much in service sector 2.3 Conceptual framework From theoretical review and empirical studies section in this chapter, structural transformation between sectors happens through out three main factors as figure below The first factor includes technological change, investment and capital (both of physical and human capital) accumulation These three components will affect significantly the productivity of each sector of an economy The second factor is the consequence of the first one By absorbing technological change, investment and capital accumulation, the sectoral productivity will increase and grow continuously The differences in productivity growth of each sector and the differences in productivity level of each sector, such as labor surplus and low productivity in agricultural sector, make the structural transformation of a country happen differently The structural transformation tends to occur from low productivity sectors to high productivity sectors The third factor mentions about the structural transformation happens in the same time of resources reallocation (labor resource and other resources) process The resources will be allocated from lower efficient to higher efficient areas In the study of this thesis, I just mention three factors as the sources and causes which impact on the structural transformation, not a deeply analysis (qualitative and quantitative) the impact of these factors to the structural transformation and economic growth Consequently, the structural transformation of a country will make a country’s development and growth This process will be continuously happened to push an economy continuously develop Figure 8: Scatter chart of service output share and Log GDP per capita Source: Author’s calculation and draw from Stata In the three sectors, the service sertor has the lowest goodness of fit R-square equals to 0.33 (since the service transformation are not in the same process as mentioned in section 4.2.1) Figure shows the scatter chart of service output share and Log of GDP per capita Figure reveals the highlights of the transformation process of services: (1) the transformation process of services is divided into three periods Period one is in the range of log of GDP per capita less than 7.0, in which the share of services increased by GDP per capita Period two is in the range of log GDP per capita from 7.0 to 8.8, equivalent to the GDP per capita from US$ 1,100 6,600 per person, the share of services is constant (sometimes slightly reduction) at 48% of total GDP This suggests that, in this period, the share of agriculture began to slow down, while the share of industry, which is on the rise to maximum, has completely absorbed the reduction in agriculture Period three is from the log of GDP per capita greater than 8.8, equivalent of US$ 6600 per person, the share of services increased strongly (in this moment, both agriculture and industry are reduced); (2) with the platform of contributing of 48% to the total GDP of the 26 economy, the services moved from the first phase to the second phase of structural transformation at the level of GDP of US$ 6,600 per person; (3) analysis for each country, figure shows at the opposite to industry sector, service sector of China, Indonesia, and Malaysia lie beneath the fitted curve Sri Lanka and India lie above the fitted curve The highlight of the service sector is of Vietnam and The Philippines The distribution points of Vietnam from above the fitted curve, have moved down below the fitted curve when the log of GDP per capita greater than Meanwhile, the service sector of the Philippines from below the fitted curve has shifted upward the curve Figure 9: Structural transformation of Asian developing Countries Source: Author’s calculation and draw from Stata Figure which is a combination of figures 6, 7, and shows us the structural transformation of Asian developing countries 4.2.3 Structural transformation and labor productivity of Vietnam and a comparison with Malaysia, Thailand and the Philippines Although Vietnam maintained a relatively high GDP per capita growth and stability at 5.11% in the period 1985-2010 (Malaysia 3.38%, Thailand 4.41%, the 27 Philippines 1.33%), but GDP per capita of Vietnam is still lower than Malaysia, Thailand and the Philippines Agriculture share (% GDP) 50 40 30 20 10 1986 1985 50 40 Industry share (% GDP) 60 30 20 10 1986 1985 50 40 Service share (% GDP) 60 30 20 10 1985 Figure 10: Strutural transformation of Vietnam, Malaysia, Thailand and the Philippines Source: Author’s calculation and draw from data of World Bank, 2012 1986 28 Firgure 10 displays that although the process of economic structural transformation also took place in Vietnam and other countries, but the share of agriculture of Vietnam is always at a higher level than others and the share of the service sector of Vietnam is always lower than other countries The highlight of Vietnam in the industry is from the lowest point of all countries, the share of Vietnam's industry has continued to increase, surpassing the Philippines and very close to Thailand In the aspect of labor allocated to each sector, although the rate of agricultural workers of Vietnam fell from 70% in 1996 to 51% in 2009, but this rate is still very 1996 Sectoral Employment share Vietnam large compared with the rate of agriculture's contribution to GDP was 21% in 2009 Figure 11: Sectoral employment share of Vietnan 1996-2009 Source: Author’s calculation and draw from data of World Bank, 2012 29 % Employment in Agriculture sector 80 70 60 50 40 30 20 10 1996 35 30 25 20 15 10 % Employment in Industry sector 40 1996 60 50 40 30 20 10 % Employment in Service sector 70 1996 Figure 12: Sectoral employment share of Vietnam, Malaysia, Thailand and the Philippines Source: Author’s calculation and draw from data of World Bank, 2012 Firgures 12 shows us the sectoral employment of four ASEAN countries Labor ratio in the agricultural sector of Vietnam is at a very high level compared to 30 Malaysia, Thailand and the Philippines In the industrial sector, corresponding to the growth rate of GDP share, the shift of industry workers also follows a similar trend The industry labor rate of Vietnam has surpassed the Philippines and catched up with Thailand Similar to the agricultural sector, but in the opposite direction is the service sector of Vietnam The labor rate of service sector in Vietnam is always lower than the other countries In terms of sectoral labor productivity of the four countries, I calculated the sectoral labor productivity (US$ per person per year) From database I draw a comparison chart on the labor performance of each sector of the four countries as shown in figures 13, 14, and 15 as below From figures we see that labor productivity of Vietnam is less effective than Malaysia, Thailand and the Philippines in all three sectors In industry, labor productivity of Vietnam in 2009 was US$ 3,892 per person per year, while the numbers of Malaysia, Thailand, and the Philippines were US$ 26,637, US$ 15,144, and US$ 9,671 respectively Similarly in the service sector, labor productivity of Vietnam is also lower than other countries So we can say that the labor productivity of Vietnam is less efficient than Malaysia, 1996 US$ per person per year Thailand and the Philippines in all three sectors Figure 13: Labor productivity in agriculture sector of Vietnam, Malaysia, Thailand and the Philippines Source: Author’s calculation and draw from data of World Bank, 2012 31 per person per year 1996 US$ Figure 14: Labor productivity in industry sector of Vietnam, Malaysia, Thailand and the Philippines 1996 US$ per person per year Source: Author’s calculation and draw from data of World Bank, 2012 Figure 15: 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 and figure 16 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, 32 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 Table 4: Sectoral labor productivity of Vietnam (US$ per person per year) Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1996 US$ per person per year Source: Author’s calculation from data of World Bank, 2012 Figure 16: Sectoral labor productivity of Vietnam Source: Author’s calculation and draw from data of World Bank, 2012 33 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 5.1 Conclusions (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% repectively; (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, Thaland, 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 sectors 5.2 Recommendations Basing on the findings of this research, I would like to propose the following recommendations to the policy makers of Vietnam: 34 (1) The share of agriculture sector in total GDP of Vietnam is high, the employment share in agriculture is very high and the labor productivity in agriculture is the least efficient, therefore the government should focus and consider on rural development such as selection advantage of crop and livestock in order to improve productivity in agriculture sector therefore release labor from agriculture sector to industry and service sector which are inherently more efficient; (2) Since the industry sector of Vietnam has successfully catched up, the government should consider maintaining the growing of this sector, at the same time continue to promote policies of industrialization, modernization, and equitization to increasingly improve the performance of the industry compared to other countries; (3) Because the service sector of Vietnam is still in low position in comparirion with others ASEAN countries, the government should further expand the market for services, further diversify for its products in services sector; (4) Vietnam's agricultural labor rate is very high, the percentage of workers in the service sector is still low, and the performance of the whole three sectors are still lower than in other countries, therefore the government should research policies to promote the restructuring of labor between sectors and especially to strengthen vocational education policies (human capital investment) to improve labor productivity of Vietnam; (5) Since the GDP per capita of Vietnam is low, the government should encourage enterprises focus and invest on new technology to improve productivity output of all sectors special in agriculture and services; (6) The employment share in agriculture is going to decrease, employment shares in industry and service sectors are going to increase corresponding, and therefore the government should consider migration and urban development policies 35 REFERENCES Bah, E.M (2008) Structural Transformation in Developed and Developing Countries The University of Auckland Working Paper Bah, E.M (2009) A three-sectors Model of Structure Transformation and Economics Development The University of Auckland Working Paper Duncan, A (2007) “Cross-Section and Panel Data Econometrics - L1D025 Lecture An Introduction to panel data analysis” Retrieved October 12, 2012, from http://www.carlospitta.com/Courses/Graduate%20Info/Panel%20Data.pdf Gollin et al (2002) Structural transformation and cross-country income differences American Economic Review: Working Paper Hoang Kieu Trang (1998) Economic reforms and economic structural change in Vietnam Unpublished Master thesis, University of Ho Chi Minh city, Vietnam – Netherland program Nguyen Trong Hoai (2006), Econometrics lecture note Fullbright Economics Teaching Program Perkins, D.H; Radelet, S; Lindauer, D.L (2006) The Economics of Development, Sixth Edition New York: W.W.Norton & Company Inc Kuznets, S (1973) Modern Economics growth: Finding and Reflection American economics review, Vol 63, No 3, 247-258 Solow, R (1962) Technical Change and Aggregate Production Function The MIT Press Todaro, P., Smith, S.(2003) Economics of Development, Eighth Edition England : Pearson Education Limited Wooldridge, J.M (2002) Econometric analysis of cross section and panel data The MIT Press World Bank (2012), World Development Indicator and Global Finance Development Retrieved June 12, 2012, Available from http://databank.worldbank.org/ddp/home.do 36 ... statistics and econometric methods to explain the structural transformation process and growth of Asian developing countries To determine how the structural transformation process of Asia developing countries. .. 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. .. 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