Structural transformation and economic growth of asia developing countries and vietnam

1 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS STRUCTURAL TRANSFORMATION AND ECONOMIC

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UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

STRUCTURAL TRANSFORMATION AND

ECONOMIC GROWTH OF ASIAN

DEVELOPING COUNTRIES AND VIETNAM

Summary version

By

TRAN THIEN TAI

Academic Supervisor:

Dr TRAN TIEN KHAI

HO CHI MINH CITY, NOVEMBER 2012

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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

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TABLE OF CONTENT

CHAPTER 1: INTRODUCTION 4

CHAPTER 2: LITERATURE REVIEW 6

2.1 Theoretical review 6

2.2 Empirical studies 7

2.3 Conceptual framework 9

CHAPTER 3: RESEARCH METHOLODOGY 11

3.1 Data 11

3.2 Research methodology 11

CHAPTER 4: EMPIRICAL ANALYSIS OF STRUCTRUAL TRANSFORMATION AND GROWTH 13

4.1 Overview of economic growth of Asian developing countries in period 1985 -2010 13

4.2 Experimental study result of structural transformation Asian developing countries during 1985-2010 16

4.2.1 Result of statistics descriptive model 16

4.2.2 Result of economestric model 21

4.2.3 Structural transformation and labor productivity of Vietnam and acomparision with Malaysia, Thailand and the Philippines 27

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 34

5.1 Conclusions 34

5.2 Recommendations 34

REFERENCES 36

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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

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

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

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

ij

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

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

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labour transfer process and employment expansion in modern sector continue happening until all of surplus labour in traditional sector is absorbed 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 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

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

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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

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 of labor from public non-agriculture sector to private non-agriculture sector

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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 1 below The first factor includes technological change, investment and capital (both of physical and human capital) accumulation These three components

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

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

transformation of a country will make a country’s development and growth This process will be continuously happened to push an economy continuously develop

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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

Figure 1: Conceptual framework – structural transformation and growth

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

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 To determine how the structural transformation process of Asia 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

260 observations in a panel dataset

For each sector, I estimate by the following equation:

it gdp

gdp gdp

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According to Nguyen Trong Hoai (2006), 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 polynomial function to analyze the process The degree of polynomial function in equation (3) 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 less than 0.01.The reason I do it is try to simplify the model in the lowest degree within the highest possibility of the goodness of fit

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CHAPTER 4: EMPIRICAL ANALYSIS OF STRUCTRUAL

TRANSFORMATION AND GROWTH

4.1 Overview of economic growth of Asian developing countries in period

Vie

am In a

Korea

M

aysia

Thand

Indo

nesia

Sri La a

Nepal

Phillipp

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Corresponding to GDP growth, figure 3, table 1 below show GDP per capita and GDP per capita growth rates of these ten 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 its average annual growth rate at 5.3% and 5.1% Average annual GDP per capita 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%

0 5,000

Mal

aysia

Thai

land C na

Indo

nesia

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

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

Source: World Bank, 2012

GDP per capita of Asian developing countries

(excluding Malaysia and Korea)

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GDP per capita of Malaysia and Korea

0 5,000

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

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

4.2 Experimental study result of structural transformation Asian

developing countries during 1985-2010

4.2.1 Result of statistics descriptive model

In this section, I will analyze the structural transformation process of Asian developing countries through time by descriptive statistics method The structural transformation process of ten Asian developing countries indictaed as figure 5 below