Structural transformation and economic growth of asian developing countries and vietnam

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 proc

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

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

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ABSTRACT

This paper investigates the structural transformation and growth of some

to 2010 The paper uses polynomial model regression and description statistics

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 9

-~ 2.1 Theoretical review 9

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

GSO: General Statistics Office

TFP: Total Factor Productivity

•

CHAPTER 1: INTRODUCTION

Some empirical studies show structural transformation process is accompanied with economic growth of developed countries By history record,

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

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 1991-

2010, 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

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

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

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

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

CHAPTER 2: LITERATURE REVIEW

Chapter two provides a review of the theoretical and empirical studies of structural transformation in the world and Vietnam This chapter begins with a theoretical review of structural transformation Following by a number of empirical studies are reviewed to get a comprehensive view of what have been done on

framework which shows the relationship between structural transformation and economic growth

According to Begg et al (1995), Gross Domestic Product ( GDP) measures the output produced by factors of production located in domestic economy regardless of who own these factors In his circular flow, there are three ways to calculate GDP

of a country including expenditure, income and value-added output In value-added method, GDP is calculated base on the increase in the value of goods and services

as a result of production process of all sectors including agriculture, industrial and service sector of an economy The model is formulated as follows:

(1)

Solow ( 1962) uses the Cobb-Douglas production function to form up Solow

main factors: labour (L), capital (K) and productivity or efficiency factors (A)

in A or in multifactor productivity or improve technology to increase efficiency of labour could also increase Q I L or output per worker To concentrate on what happens to Q I L or output per worker (unless the change in employment ratio affects to output per capita), Solow rewrites the Cobb-Douglas production function

in what we shall refer to as per capita form:

Let define q = Q I L and k = K I L In other words, small letters equal per capita variables We can re-write above equation as follows:

Equation ( 4) explains output per capita will be increased significantly once productivity, efficiency or technology change happens to the economl 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

According to Todaro and Smith (2003), developing countries today are experiencing economic growth in many important routes which are significantly different from that of currently developed countries have suffered There are eight

2

In equation (4), Solow indicated q: output per person; k :capital per person

significant differences in initial conditions that can be identified and require a special analysis for economic growth: ( 1) physical and human resources endowments, (2) income per capita and level of GNP, (3) climate, (4) population size and distribution, (5) historical role of international migration, (6) international trade benefit, (7) basic scientific, technological research and development capabilities, (8) stability and flexibility of political and social institutions These significant differences may cause differences of structural transformation between developed countries and developing countries even though between country and country inside developing countries The differences of structural transformation will be referred in chapter four of this research

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 modem 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=O) The proportion of surplus labour in traditional sector will be transferred to the modem sector and makes the modem sector's output grown The labour transfer process and employment expansion in modem sector continue happening until all of surplus labour in traditional sector is absorbed In two-sector labour surplus model, Lewis makes four assumptions in both traditional sector and modem sector In traditional sector, he assumes there is surplus labour therefore MPL is zero and rural worker wage share equally base on average calculation from the output In the modem sector, he assumes that urban wage above rural average wage and modem-sector employer can hire as many surplus rural workers as they want without concerning of rising wages Despite the assumptions of Lewis are not realistic in modem economic nowadays, but the two-sector labour surplus model provides a basic theory of structural transformation The structural transformation

of the economy can take place with the growth of the modem sector and modem 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 Perkins et al (2006) emphasizes that economic growth involves increasing

the share of agriculture in total output decreases, while the share of industry and services increase; (2) the proportion of labour force in agriculture declines, while this proportion in industry and services expand; (3) the population in urban area blow up as households tend to move from rural to cities; ( 4) products begin to be produced by enterprises instead of households Therefore, the share of goods and services, which are sold in the market, increases

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

emphasizes six characteristics that every developed country manifested in the process of economic growth: ( 1) high growth rates in per capita product and population; (2) rise in productivity rate; (3) high rate of structural transformation in economy The major aspects of structural transformation include the shift away

from agriculture to non-agriculture and from industrial to services recently, resulting in the declining in the proportion of labour force in agricultural sector over total labour force The U.S agricultural labour force declined from 53.3% in 1870

to less than 2% in 2000 Similarly, in European countries such as Belgium, agricultural labour force decreased from 51% oftotallabour share in 1846 to 12.5%

in 194 7 and less than 7% in 1970; ( 4) the closely related and extremely important of social and ideological structure have also changed quickly where urbanization and secularization come up easily; (5) increasing power of technology, especially in transportation and communication

Chenery ( 1979) identifies several characteristic features of economic growth

agriculture to industrial production; (2) steady accumulation of physical and human capital; (3) change in consumer demands from focusing on food and basic necessities to hunger for diverse manufactured goods and services; ( 4) growth of cities and urban industries as people migrate from farm and small town to the cities; ( 5) decline in family size and overall population growth; ( 6) despite of spread of modem economic growth, but three-quarters of world population still fall into of minimum level with the potential of modem technology

2.2 Empirical studies

The issue of structural transformation has been studied by many researchers in some aspects such as structural transformation and economic growth, structural transformation and productivity in each sector of the economy, etc In this section, I want to recall empirical studies of growth and structural transformation of the world and Vietnam

Bah (2008) analyzes structural transformation of developed countries

including nine countries, such as Australia, Canada, France, Germany, Italy, Japan,

Sweden, United ofKingdom, and the United States, during the period 1870-2000

& it is the error term

Since the degree of polynomial is determined by the goodness of fit Bah starts from a linear polynomial, then increases the degree of function by one and continue this process until the change of R-square is less than 0.01 By this way, Bah identifies that the relationship between agriculture sector's output share and log of GDP per capita is best fitted by a quadratic polynomial The R-square for the fixed-effect estimation is 0.92 The relationship between industrial sector's output share and log of GDP per capita is best fitted by a third degree polynomial The R-square

is 0.63 For service sector, the relationship is best fitted by a third degree polynomial and R-square is 0.74 To analyze the homogeneity of structural transformation process between countries, Bah uses both ox scatter chart and Least Square Dummy Variable (LSDV) model to measure the fixed effects of each country and then compare it with the average fixed effects of nine countries The results of this comparison provide an understanding in homogeneity between countries Bad estimates the mean standard deviation of fixed effects for each country in agriculture is 3.7, while this number is 3.1 for industry and 2.5 for

5

This polynomial function and model will be used in this research and will be referred in chapter three and chapter four of this paper

service In this research, Bah finds that: (1) developed countries follow a homogeneity process of structural transformation; (2) the structural transformation

of developed countries is well 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

The United Nations (2006) points out that productivity growth in developed countries mainly relies on technological innovation, while in developing countries, growth and development are much less on pushing the technology and much more about structural transformation of production so as to direct it towards activities with higher levels of productivity Structural transformation can be achieved largely

by adopting and adapting existing technologies, substituting imports, joining the world market for manufacturing goods and services and through rapid accumulation

of physical and human capital The report also mentions that investment and capital

share of agricultural and industrial output are strongly associated with investment growth or capital accumulation which took place at a rapid pace in the successful Asian countries and was directed towards their industrial sectors

'

Hoang Kieu Trang ( 1998) analyzes structural change of Vietnam during

1980-1997 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 1978-2003: (1) high productivity in private non-agriculture sector; (2) reallocation of labor from agriculture sector to non-agriculture sector, (3) reallocation oflabor from public non-agriculture sector to private non-agriculture sector

Duarte & Restuccia (20 1 0) examine the role of sectoral labor productivity and the reallocation of labor across sectors to explain the process of structural transformation The paper uses panel dataset of annual aggregate GDP per hour, value added per hour and the share hours for agriculture, industry and service sector

of 29 countries including developing countries such as Argentina, Venezuela, Mexico, Korea, etc and developed countries such as the US, United of Kingdom, Japan, Australia, etc from 1950-2004 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

Gollin et al (2002) studies the important role of agricultural sector and the effect of agricultural policy on a country's development and growth The paper uses the data of 62 less developed and developing countries over the world including

Asian developing countries such as Korea, Malaysia, Indonesia, China, India, and The Philippines from 1960 to 1990 In the first part of the paper, the authors explore that agricultural sector plays three important roles in a country's development and growth Firstly, agriculture plays important role as subsistence food for the population and food security for a country Second is the role of agricultural productivity growth and agricultural transformation Countries that have succeeded

in increasing productivity in agriculture have experienced the relative decreases significantly in agriculture's share of GDP The increasing productivity in agriculture is able to release labor force and other resources from agriculture to non-agriculture sector and make structural transformation happen Third is the role of agricultural productivity growth and economic growth In most of countries, agricultural productivity growth is more rapid than non-agriculture productivity growth The agricultural productivity growth significantly affects the fast growth of GDP per capita of these countries In second part of the paper, the authors discover that low agricultural productivity can delay the start of industrialization in a country for a long period of time and it causes GDP per capita of a country to fall far behind industrial leading countries

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 1 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 and grow The below figure 1 describes the interaction between structural transformation and economic growth This paper will analyze structural transformation process and GDP per capita growth of Asian developing countries basing on what Kuznets ( 1971) has realized for developed countries Structural transformation is distinguished 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 reallocated from agriculture to industrial and service sector In the second phase, resources are again reallocated from both agriculture and industrial to service sector In other words, as GDP increases, agricultural output share tends to decrease and industrial output share concurrently increases in beginning state and then decreases subsequently, while service output share is always in the trend of

mcreasmg

Along with other empirical studies in this chapter, the research of Kuznets ( 1971) is entirely consistent with the general trend of structural transformation today Agriculture, with the application of scientific advances in breeding and management technology constantly over time, the efficiency has been improved significantly and the output constantly increased With this result, a proportion of agricultural resources will be allocated to other sectors in industry and services with more efficiently while still maintaining the growth of agricultural output,

contributing to continuously reduce the share of agriculture in GDP in the process

of growth and development of the economy Industry of a country in the early stage

of development is often primitive and simple such as light industry and simple processing industry But with the absorption of capital investment and technology change quickly will make the value of the industry increased significantly during the first period of the development However, the level of absorption of capital and technology in industry gradually comes to a peak (because capital and technology are limited and the rate of absorption of capital and technology in terms of benefits will be reduced) The ratio of industrial output to total GDP will begin declining in the second stage of the development The resources are then gradually allocated to services Service sector in the beginning of the development of the economy is simple, diversity is not much, quality is not high, economic resources is not fully focused on But with the growth of the economy over time, the increase in GDP per capita, the share of services in GDP is constantly increasing, although its growth rate is still slow in the beginning of the development However, when reaching out

to the second stage of development, when the resources from agriculture and industry are moving on, plus the accumulation of human capital and the development of knowledge technologies, the share of services in GDP will grow strongly In this phase, the service sector is very diverse, quality and performance are increasing rapidly

In addition, there will be a difference in the speed of structural transformation

of the developing countries today and the developed countries in the last century In the 20th century, the structural transformation of the developed countries took place

in the context of low technological change, so the intensive use of labor is very high This means that the surplus labor in agricultural sector will be quickly absorbed in other sectors Therefore, the speed of structural transformation will take place faster than developing countries today that are in the period of high science and technology, gro\\'1h focus more on capital accumulation and technology change rather than on labor intensity

•

c

Figure 1: Conceptual framework- structural transformation and growth

Source: author's creation base on theoretical review and empirical studies

CHAPTER 3: RESEARCH METHOLODOGY

Chapter three plays a mediating role in linking the theoretical background for the empirical analysis It firstly provides information about the data used Followed

by methodology used to analyze the data, in which empirical models are presented

3.1 Data

The data m this research is mainly collected from World Development Indicators and Global Development Finance of the World Bank A time series of26 years from 1985- 2010 of 10 Asian developing countries, including Vietnam,

Thailand are collected to form up a panel data with 260 observations The choice of these countries based on data availability together with other criterias such as the less abundant of the nature resource of land by which countries like Singapore and Taiwan are excluded Countries which have mining and oil production above 30%

of GDP recently such as Middle East countries are also excluded The selection also considers some countries leading in GDP per capita such as Korea, Malaysia and some other countries which have GDP per capita close to Vietnam such as Thailand, Indonesia and the Philippines

3.2 Research methodology

In this paper, I apply both descriptive statistics and econometric methods to explain the structural transformation process and growth of Asian developing countries and apply descriptive statistics method only to compare the structural transformation and labor productivity of Vietnam versus Malaysia, Thailand and the Philippines Levels of analysis are mostly focused on country and sectoral levels of economy To determine how the structural transformation process of Asia

6

Despite of Korea can not be counted as developing country now, it was helpful to analyze for period 1985-2005

developing countries is and whether these Asian developing countries follow up the same process of structural transformation, I use polynomial functions to indicate the relationship between sectoral output share such as agriculture, industry and services and log of GDP per capita of all countries The polynomial function is fitted from

gdp;, is GDP per capita of country i in period t

According to Nguyen Trong Hoai (2006), there are many functions in econometrics such as linear function, Cobb-Douglas production function, linear-log function, interaction function, lag function, etc and polynomial function Polynomial function reflects the long-run average trend between dependent and independent variables Since structural transformation process will need to be observed and analyzed in long period time to reflect the long term average trend between sectoral output share and log of GDP per capita, therefore I select

7

Accordance to Alan Duncan (2007), Cross-section and Panel Data Econometrics, using panel data method can increase precision of regression estimates; provide ability to control for individual fixed effects; provide the ability to model temporal effect without aggregation bias

8

Bah (2008) uses the model by equation (5) to analyze structural transformation in developed countries

9 In this research fixed effect shows initial conditions of each country for structural transformation

as Todaro and Smith (2003) in chapter 2 mentioned The Initial condition can be different between countries such as nature resources, physical and human resources endowments, GDP and GDP per capita, climate, population size, international trade benefit, basic scientific and technological research and development capabilities, stability and flexibility of political and social institutions

polynomial function to analyze the process In this paper, I use GDP per capita instead of GDP because GDP per capita reflects more reality of an economic growth in term of income per person, and it is easy to compare across countries no matter what their population Additionally, the use of log of GDP per capita in this paper as dependent variable rather than GDP per capita is because of by using log

of GDP per capita, I can explain the relationship between sectoral output share and GDP per capita in percentage For example, with 1% increases in GDP per capita, how many percentage changes in sectoral out put share If I don't use log of GDP per capita, I have to explain this relationship in absolute value, e.g with 1 US$ changes in GDP per capita, how many percentage changes in sectoral out put share The degree of polynomial function in equation (5) is determined by the goodness of fit Starting from a linear polynomial, the degree of function will be increased one by one and continuing this process until the change of R-square is

within the highest possibility of the goodness of fit

within a country and variation between countries over the period 1985-2010 are

deviation from the mean of each countries The distribution of this coefficient such

as standard deviation will helps us to determine the heterogeneity between countries (Bah, 2008) In the following chapter four, I will discuss and analyze the structural

10

Once the degree of the polynomial increase, R-square tends to improve, I also experimented higher degree, but there were no improvement larger than 0.01 in the fitting of the data

- - -

-transformation process of Asian developing countries and the companson of structural transformation and labor productivity of Vietnam versus Malaysia, Thailand and the Philippines

CHAPTER 4: EMPIRICAL ANALYSIS OF STRUCTRUAL

TRANSFORMATION AND GROWTH

Chapter four provides an overview of economic growth of Asian developing countries in periods 1985-2010 Then an experimental study results of structural transformation Asian developing countries during 1985-2010

4.1 Overview of economic growth of Asian developing countries in period 1985-2010

Recent studies of the rapid economic growth (presented by GDP and GDP per capita growth) of Asian developing countries attributed the change of macroeconomic, trade policies including trade barrier reduction, liberalized and competitive domestics market, high domestics saving rate for investments The analysis of structural transformation of Asian developing countries may provide another aspect of rapid growth of these countries Many of Asian developing countries had spectacular growth over last three decades, special particular after

1985 until financial crisis during 1997 Table 1 and figure 2 below show the economic growth in GDP often Asian developing countries

c 4.0

the second group achieved good economic growth from 5% to 7% Leading this group is Vietnam maintained average annual economic growth 6.8% Following to Vietnam is India, Malaysia, Thailand and Indonesia which annual growth rates respective 6.4%, 6.1 %, 5.9%, 5.6% and 5.2% The third group maintained moderate annual growth from 3% to less than 5% including Sri Lanka, Nepal and the Philippines have respective annual growth 4.9%, 4.5% and 3.7%

Observation in table 1, comparison with period 1985-1990, China experienced very rapid growth in period 1991-2000 and 2001-2010 within annual growth 10.5% Similar this trend of China is Vietnam maintained average growth 1991-2000 and 2001-2010 are 7.6% and 7.3% respective versus average annual growth rate during 1985-1990 is 4.63% On another trend, growth rate of Korea and Thailand maintained very good period 1985-1990, with average annual growth rates maintained 9.2% and 9.4% respective But in periods 1991-2000 and 2001-2010

Corresponsive to GDP growth, Figure 3, Table 2, Table 3 below show GDP per capita and GDP per capita growth rates of these eleven Asian developing countries China maintained highest average annual GDP per capita growth at 9.0% during 1985-2010 Following to China are Korea and Vietnam maintained average

growth rate of India, Thailand, Sri Lanka, Indonesia, Malaysia, Nepal and The Philippines during 1985-2010 are respective 4.5%, 4.4%, 3.8%, 3.7%, 3.4%, 2.2% and 1.3%

11

In detail of dataset, I saw Korea growth negative 6.9% in 1998 during financial crisis staring 7/1997

12

During financial crisis 1997-1998, Thailand got negative growth -1.4% in 1997 and -10.5% in

1998 During Economics crisis started 2008, Thailand also got -2.3% growths in 2009

•

I

-~ 20,000 'E

~

§ 15,000 .s

Figure 3: GDP per capita 1985 and 2010 (current, US$)

Source: Author draw base on data from World Bank, 2012

Source: World Bank, 20 12

GOP per capita of Asian developing countries

(excluding Malaysia and Korea)

9.02 5.32 5.11 4.51 4.41 3.8 3.71 3.38 2.17 1.33

5,000 , 4,500 + - - - l c -

'

20,000

~ ::;)

Figure 4: GDP per capita of Asian developing countries 1985-2010

Source: Author draw base on data from World Bank, 2012

developing countries during 1985-2010

4.2.1 Result of statistics descriptive model

outside to serve the needs of domestic production In other words, economic growth

of Korea is totally dependent on external resources (Hoa Huu Lan, 2002)

Korea's economy was opened very soon In the 1960s, Korea's economy has opened, attracting foreign investment, as well as absorpting high-tech and technology from the developed countries to facilitate the economic development of Korea afterward Therefore, GDP per capita of Korea reached US$ 20,700 per person in 2010 (World Bank, 2010), the highest among others Asian developing countries in this research

Because of unfavorable natural conditions, the cost of agricultural production

in Korea is higher than other countries Rice occupies a high proportion in Korea's agricultural sector Korea's agricultural policy is located to meet domestic food demand by improving the efficiency of agricultural production, mechanization and modernization of agriculture and rural areas, improving livestock breeds and plantplanting With the improvement of production efficiency in agriculture, the percentage share of agriculture on GDP of Korea has reached 13.5% and continuing decline to 2.6% from 1985 to 2010

Growth strategy based on export-oriented industries has taken Korea's industry developed very early In 1970, Korea had succeeded in the development of the energy and chemical industry The industries that were developed in this phase were mainly iron, steel, transport equipment, household electronics, shipbuilding, and petrochemical Switch to the period 1980 -2010, Korea industry turned to development based on the products with high technical content and high value

microelectronics and advanced chemical, etc Emerging in the industry is the chaebols and latter is well-known industrial corporations such as Hyundai, Samsung, LG, etc Figure 5 below shows the industrial share in GDP of Korea which is stable in the last 26 years In the first period from 1985 to 1997, percentage

share of industry sector in GDP ofKorea increased from 39.1% to 41.1% but from

With the open markets and following the free-trade policy very soon, compared to others Asian developing countries, the service sector of Korea contributed at a high level in total GDP share Figure 5 below shows the service sector share in GDP of Korea was at 48% in total GDP in 1985 and the contribution

of service sector of Korea continuously increased during 1985-2010 and maintained

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a tropical monsoon climate, annual temperature range from 21oC to 32oC Malaysia

is also a rich country in minerals such as tin, bauxite, gold and oil, etc Malaysia's land is suitable for perennial agricultural crops such as rubber, palm oil, etc

Malaysia's agriculture develops earlier than other countries in the ASEAN region In the years 1950 -1970, the Malaysian government has focused on agricultural development and takes advantage of abundant labor resources at that time So compared to other A SEAN countries, entering the period 1985 -2010, Malaysia's agriculture has developed quite high The share of agriculture in total GDP of Malaysia in 1985 was 20%, then continuously decreased and maintained at 10% in 2010

Malaysia focuses on industrial development policy, oriented to encourage import substitution industries and export-oriented The product strengths of the Malaysian industry are the electric industry, electronics, appliances and apparel which not only meet the domestic demand, import substitution but also strongly penetrate into export markets (Nguyen Thi Hong Thuy, 2008) Figure 5 shows the share of industry in total GDP of Malaysia increased from 3 8% in 1985 to 48% in

2008, although this proportion decreased to 45% in 2010

Along with the growth of industrial sector, the service sector of Malaysia has also increased over time and over GDP per capita Service sector increased from 42% in 1985 to 45% in 2010 Malaysian government focuses on the development of this sector such as financial services, telecommunications, banking and high-tech

In addition, Malaysia's services sector such as aviation services, infrastructure,

systems hotels, supermarkets modern, recreation areas, etc, are also well developed and contributed to the increase in total GDP

4.2.1.3 Thailand

Thailand is located in the center of South East Asia with an area of 513, 115 km2 The area of Thailand is the third in the South East Asia region, after Indonesia and Myanmar Except for the northern region with mountain and the eastern highlands, the central region of Thailand is the fertile plains, suitable for rice cultivation In 2010, the population of Thailand was 69 million people and GDP per capita of U $ 4,600 per person

Due to the favorable geographical location and natural conditions, Thailand is

a country with great potential for agricultural development Thailand's rice, due to the competitive advantage in price over the US and in quality compared to Vietnam, Thailand has become the world's top rice exporter Along with Vietnam, Thailand also exports much of natural rubber to the rest of the world Thailand is the country with the third largest fishing grounds in Asia after Japan and China (Nguyen Thi Hong Thuy, 2008) With the support of the United States, along with significant improvements in production efficiency and improving labor productivity through transformation from mono to multi-cultivation, and with the mechanization of agriculture, the agriculture of Thailand has made positive changes in the period 1961-1972 The share of agriculture in total GDP has declined from 60% in 1961 to 30% in 1972, at the same time, the share of industry increased from 28% to 41% and services from 12% to 29% Per capita income of Thailand is increased by an average of 7.6% in the period 1961-1972 We can say that before entering the research phase of this study 1985-2010, Thailand has been a structural shift dramatically in the period 1961-1972

Switching to the period 1985 -2010, Thailand's agriculture has been a development The share of agriculture reduced from 16% to 12% The industry is mainly focused on light industry, garment and processing industry With the shift of

labor from agriculture to non-agriculture sector, along with policies to promote foreign investment in industry, increase import-substitution industrial production and export-oriented, the share of industry increased from 32% in 1985 to 41% in

1996 (before the Asian financial crisis in 1997) and continued to rise 45% in 2009 The strength of the service sector of Thailand focuses on tourism and labor exports Upon entering the stage in 1985, Thailand is one of the countries with the highest share of service sector in GDP in 10 Asian developing countries in this research The service share of Thailand reached 52% in 1985 With the strong impact of the financial crisis in 1997 and the tsunami in 2004, the service share reduced from 52% in 1985 to 43% in 2010 Therefore, the feature in the process of structural transformation of Thailand in the period 1985-2010 is the decline of service sector

4.2.1.4 China

China is located in Northeast Asia with the vast area of land and sea borders adjacent to 15 countries The area of China is the third-largest in the world after Russia and Canada The favorable area and geographical position have helped China easier in the development of trade and economic relations with the major countries in Europe, America, Southeast Asia, Australia and other areas In addition

to the potential of the market brought about by geographical location, China has abundant natural resources such as crude oil, coal, iron and steel, with a coastline bordering the continent more than 18,000 km, etc The diversity and abundance of natural resources are favorable factors for China in the process of structural transformation and economic development (Pham Thai Quoc, 2001 ) China is the world's most populous country, with a population in 2010 of 1.3 billion people This

is a huge, potential, and largest market in the world Per capita income of China in

2010 was US$ 4,228 per person (World Bank, 2010)

Before entering the period 1985-2010, China had more than 30 years 1979) in the industrialization process of the former Soviet model Thirty years of