Structural transformation and economic growth of asia developing countries and vietnam

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

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

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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 statisticsmethod Findings from the paper includes: (1) except Korea and Malaysia, othersAsian developing countries are all in the first phase of structural transformation.Agriculture sector trends to decrease once GDP per capita increases Industry sectortrends to increase once GDP per capita increases Service sector increases once GDPper capita increases; (2) the threshold of structural transformation from the firstphase to the second phase is when GDP per capita equals US$ 6,600 per person Atthat level, sectoral share of agriculture, industry, and services reach 7%, 45% and48% respectively; (3) Asian developing countries including Vietnam are not allfollowed 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 oflabor distribution in the agricultural sector of Vietnam is high compared toMalaysia, Thailand, and the Philippines and in the opposite direction, the rate oflabor in services of Vietnam is low compared to Malaysia, Thailand, and thePhilippines; (6) labor productivity in all three sectors of Vietnam are lower thanMalaysia, Thailand, and the Philippines but the most inefficient is agriculturalsector, 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

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 Asian developing countries in period 1985 -2010

4.2 Experimental study result of structural transformation Asian developing 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 isaccompanied 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 ofthem 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 identifiesseveral characteristic features of development process One of them is the shiftaway 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 akey role in economic growth of the world It is useful to analyze what is thestructural transformation process of Asian developing countries including Vietnam?

My paper tries to achieve three main objectives: (1) to analyze structuraltransformation process1 of some Asian developing countries, including China, India,Indonesia, Korea, Malaysia, Nepal, the Philippines, Sri Lanka, Thailand andVietnam, during 1985-2010; (2) to analyze labor productivity of between Vietnamand Malaysia, Thailand and the Philippines; (3) to implicate ways to improvestructural transformation process of Vietnam Therefore, the main questions of thispaper research are: (1) how is the structural transformation process of Asiandeveloping countries? (2) is the structural transformation process of Asiandeveloping countries homogenous? (3) what are the differences of structural

1 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

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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 theliterature review including the theories and empirical studies of structuraltransformation in the world and Vietnam Chapter three describes the dataset andresearch methodology Chapter four analyzes the structural transformation process

of Asian developing countries and the comparison of structural transformation andlabor productivity of Vietnam versus Malaysia, Thailand and the Philippines Base

on the main findings identified in chapter four, chapter five will come out with themain conclusions, policy implications and limitations of this research

va ij 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

q = A k α

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 continuehappening 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 themodern sector and modern industry (industrial and service sector) without reducingagricultural output.

According to Perkins et al (2006), the Engel’s law was developed by ErnstEngel in the nineteenth century The law states that when household incomeincreases, the proportion of income spent on food decreases This is one reason toexplain the decline of agriculture’s share in total production when the GDP percapita increases Another reason comes from the productivity gains in agriculturedue to technological change which promotes the process of liberalization of thelabour force and allow them joining in non-agricultural sector such as industry andservices

Kuznets (1971) finds out that developed countries are following up the sameprocess of structural transformation He distinguishes structural transformation intotwo different phases The first phase is in the beginning of development process, inwhich an economy allocates most of its resources to agriculture sector As theeconomy continues to develop, resources are then re-allocated from agriculture toindustrial and service sector In the second phase, resources are re-allocated fromboth agriculture and industrial to service sector2

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

2 This 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 Servicesector always increases in the first phase and second phase of development; (3) thethreshold 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 secondphase of development

Bah (2009) explores that beside the thing that structural transformation play apositive role in economic growth, Total Factor Productivity (TFP) of each sectoralso play an important role in economic growth He uses panel data on sectoremployment 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 Hefinds out that relative to the US, developing countries are least productive inagriculture, 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 ofVietnam increases higher than GDP growth rate; (2) structural change, including thedeclining of agriculture, increasing of industry and services, provides positiveimpact to economic growth

Dekle & Vandenbroucke (2006) investigate how structural transformationimpact 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 oflabor from agriculture sector to non-agriculture sector, (3) reallocation of labor frompublic non-agriculture sector to private non-agriculture sector

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Duarte & Restuccia (2010) examine the role of sectoral labor productivity andthe reallocation of labor across sectors to explain the process of structuraltransformation The authors find that (1) sectoral labor productivity differencesacross countries are large, both at a point in time and over time In particular, laborproductivity differences between developed and developing countries are large inagriculture and services and smaller in industry; (2) over time, productivity gapsbetween developed and developing countries have been substantially narroweddown in agriculture and industry but not really as much in service sector.

From theoretical review and empirical studies section in this chapter, structuraltransformation between sectors happens through out three main factors as figure 1below The first factor includes technological change, investment and capital (both

of physical and human capital) accumulation These three components will affectsignificantly the productivity of each sector of an economy The second factor is theconsequence of the first one By absorbing technological change, investment andcapital accumulation, the sectoral productivity will increase and grow continuously.The differences in productivity growth of each sector and the differences inproductivity level of each sector, such as labor surplus and low productivity inagricultural sector, make the structural transformation of a country happendifferently The structural transformation tends to occur from low productivitysectors to high productivity sectors The third factor mentions about the structuraltransformation happens in the same time of resources reallocation (labor resourceand other resources) process The resources will be allocated from lower efficient tohigher efficient areas In the study of this thesis, I just mention three factors as thesources and causes which impact on the structural transformation, not a deeplyanalysis (qualitative and quantitative) the impact of these factors to the structuraltransformation and economic growth Consequently, the structural transformation of

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

and grow The below figure 1 describes the interaction between structuraltransformation and economic growth This paper will analyze structuraltransformation process and GDP per capita growth of Asian developing countriesbasing 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

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CHAPTER 3: RESEARCH METHOLODOGY

The data in this research is mainly collected from World Development

Indicators and Global Development Finance of the World Bank A time series of 26

years from 1985– 2010 of 10 Asian developing countries, including Vietnam, China,

India, Indonesia, Korea, Malaysia, the Philippines, Sri Lanka, Nepal and Thailand

are collected to form up a panel data with 260 observations

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:

gdp it is GDP per capita of country i in period t

 it is the error term

According to Nguyen Trong Hoai (2006), polynomial function reflects thelong-run average trend between dependent and independent variables Sincestructural transformation process will need to be observed and analyzed in longperiod time to reflect the long term average trend between sectoral output share andlog 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 offit 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 than0.01.The reason I do it is try to simplify the model in the lowest degree within thehighest 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

Figure 2: Average GDP growth of Asian developing counties, 1985-2010 (%)

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

Based on the economic growth rates, the countries can be divided into threegroups The first is very rapid GDP growth group above 7% annually during 1985-

2010 which only China achieved average annual growth 10.0% Follow to China isthe second group achieved good economic growth from 5% to 7% Leading thisgroup is Vietnam maintained average annual economic growth 6.8% Following toVietnam is India, Malaysia, Thailand and Indonesia which annual growth ratesrespective 6.4%, 6.1%, 5.9%, 5.6% and 5.2% The third group maintained moderateannual growth from 3% to less than 5% including Sri Lanka, Nepal and thePhilippines have respective annual growth 4.9%, 4.5% and 3.7%

Corresponding to GDP growth, figure 3, table 1 below show GDP per capitaand GDP per capita growth rates of these ten Asian developing countries Chinamaintained highest average annual GDP per capita growth at 9.0% during 1985-

2010 Following to China are Korea and Vietnam maintained average its averageannual growth rate at 5.3% and 5.1% Average annual GDP per capita growth rate ofIndia, Thailand, Sri Lanka, Indonesia, Malaysia, Nepal and The Philippines during1985-2010 are respective 4.5%, 4.4%, 3.8%, 3.7%, 3.4%, 2.2% and 1.3%

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

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

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Table 1: Average GDP per capita growth 1985-2010 (%)

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 Asiandeveloping countries through time by descriptive statistics method The structuraltransformation process of ten Asian developing countries indictaed as figure 5below

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