Determinants of economic growth in Vietnam

Hoàng Thị Thu Tạp chí KHOA HỌC & CÔNG NGHỆ 124(10): 31 - 37 DETERMINANTS OF ECONOMIC GROWTH IN VIETNAM Hoang Thi Thu* College of Economics and Business Administration - TNU SUMMARY This study explores factors that determine the economic growth in Vietnam by using time-series model in 1988-2013. The study shows that there are strong and positive effects of domestic investment and foreign direct investment on Vietnamese economic growth as a channel of increasing the stock of capital. Exchange rate and Asian financial crises also determine the economic growth. However, human capital and trade in Vietnam are not yet the channels that increase Vietnam’s economic growth. Keywords: determinant, economic growth, FDI, domestic investment, Vietnam INTRODUCTION* 1986. Nearly three decades since 1986, the Recognized as a premier target for the Vietnamese economy has grown at a rate of economic development, economic growth and 7.5 percent annually. So what are the major its determinants have attracted increasing factors that determine high economic growth attention in both theoretical and applied in Vietnam since its economic reform in research. Literature on economic growth 1986? What useful policy implications can showed that there are a several partial theories the country apply to increase its economic discussing the role of various factors in growth in the long run? This study intends to determining economic growth. In neoclassical address these specific questions. growth model, such as Solow’s growth The structure of the study is organized as model, investment and labor are emphasized follows. Section 2 presents the model, data as important determinants of economic and research methodology. Section 3 presents growth. The endogenous growth theory of the findings and interpresentation. The final Romer (1986, 1990) and Lucas (1988) added section deals with conclusions and policy human capital and innovation as the new implications. factors for explaining economic growth. METHODOLOGY AND DATA Besides, labor, human capital, domestic Model specification investment, openness and some non economic factors showed both insignificant and The purpose of this research is to examine the significant effects on economic growth in determinants of economic growth in Vietnam several empirical researches. over the 1988-2013 period. Based on the theoretical models of the neoclassical and Since the launch of market-oriented economic endogenous growth and some empirical reforms in 1986, Vietnam move towards trade liberalization. Market orientation, open- analysis models such as Romer (1990) and economy and competition for foreign direct Markiw-Romer-Weil (1992), the research has investment with other regional and global developed the model to identify the most markets were important policies to important determinants of economic growth Vietnamese government restructuring the in Vietnam. The econometric model is economy. Economic growth increased derived from a production function in which dramatically in Vietnam over time. In 2013, economic growth is the dependent variable. the GDP value was nearly seven times that of Foreign direct investment, domestic capital, labor, human capital, trade, exchange rate and * Tel: 0989 910591 some dummy variables are independent 31 Hoàng Thị Thu Tạp chí KHOA HỌC & CÔNG NGHỆ 124(10): 31 - 37 variables. The augmented production function presented in front of each variable denotes the will have the following form: first differences of these variables. βi is the β1 β2 β3 β4 β5 β6 individual effect which assumed to be Y = A L F I H T E (1) constant over time t while error εt is a where Y represents output or gross domestic stochastic disturbance. production (GDP), L is labor. H denotes Hypotheses human capital as a skilled labor. I is domestic investment. F stands for foreign direct The empirical growth literature has identified investment (FDI). T presents the country’s a number of variables that are typically correlated with economic growth. Like many international trade. A is an overall efficiency existing studies, this research expects the factor, capturing the control and policy effect of each determinant on economic variables that are not accounting for increase growth of Vietnam as follows: in factor inputs I, F, L, T, E and H and frequently included as determinants of growth Through capital accumulation, domestic investment (DI) and foreign direct investment in cross-host-area studies (see in Barro and (FDI) bring financial resources to host Sala-i-Martin, 1995, chapter 12). countries. Output growth can additionally Assuming the production function to be linear result from a wider range of goods in FDI and in logarithms, the research takes the natural domestic investment related production. logarithm, and then time derivatives of this Moreover, FDI is considered an important production function. Also, the use of 1st source of technological change and human differences in econometric studies facilitates capital augmentation. Therefore, FDI and DI the results explanation, since the first are expected to have positive effects on differences of logarithms of initial variables economic growth in the nation. represent the rate of change of these variables. Human capital (HK) is an important element The determinants of economic growth in of economic growth. The greater the level of Vietnam are presented as folows: human capital development leading to expansion of its physical capital to match a DLnGDP =  +  DLnFDI +  DLnDI + t 0 1 t 2 t high endowment of human capital, the faster a 3 DLnHKt + β4 DLnTRADEt + β5 DlnLt + β6 country grows. Moreover, as a production DLnEXCHANGE +Rj + εt (2) input, a change in HK is correlated with the The dependent variable GDP is the value of change in economic growth. Well developed GDP at current price in the year t. The labor force, in terms of better education and independent variables are constructed by a set health, is likely to be able to produce more of annual factors capturing various aspects of production from a given resource base than endowments relevant to the determinants of less-skilled workers. In this research, I economic growth. L is the population density hypothesize a positive relationship between in the year t, present the labor factor in the economic growth and human capital in model. HK is the number of upper secondary Vietnam. school pupils per 10000 inhabitants, proxy Labor force is one of the important factors of human capital in the host country. TRADE is economic growth. Increasing labor force the value of international trade (exports plus could gain in total factor productivity and imports) over each year. DI presents the value economic growth. However, if the labor force of domestic investment at current price and is growing, then a share of the economy’s FDI is the total registered capital of FDI investment is used to provide capital for new inflow. Rj is dummy variable, taken into workers, rather than to raise capital per account to present the national effects on the worker. The research assumes that labor helps economic growth. In the model, D that increasing economic growth in Vietnam. 32 Hoàng Thị Thu Tạp chí KHOA HỌC & CÔNG NGHỆ 124(10): 31 - 37 How does international trade affect economic the period from 1986 to 2013 were collected growth? The literature shows that trade leads and calculated from various issues of the to higher specialization and, thus to gains in Statistical Yearbook of Vietnam, Vietnam total factor productivity and economic growth General Statistics Office. Since the data of by allowing countries to exploit their areas of FDI and international trade are in US dollars, comparative advantage. Moreover, it expands they are converted into Vietnam Dong (VND- potential markets, which allows domestic Vietnamese currency) using yearly average firms to take advantage of economies of scale, USD/VND exchange rate obtained from the exposure to competition and the diffusion of socio-economic data indicators in the Vietnam technological innovations and improved – 20 years of renovation and development, managerial practices through stronger General Statistics Office, Vietnam. interactions with foreign firms and markets. These could result in both higher overall EMPIRICAL FINDINGS efficiency and possibly a higher level of Stylized fact on Vietnamese economic investment. Based on the discussions, the growth since its economic reform study expects that international trade is the Vietnam has been in transition from a factor promoting economic growth. centrally planned to a market oriented The exchange rate does not traditionally economy since December 1986. From that occupy a central role in growth regressions time up to the present, Vietnam had seen because it only recently entered theoretical amazing economic achievements in growth of models of economic growth. However, there gross domestic product (GDP), GDP per has been a gradual recognition of the real capita, foreign direct investment, and exchange rate’s role in the growth process. In important trade and economic agreements fact, the disastrous effects of overvaluation on signed with major partners. economic growth are widely documented in The economic growth rate of Vietnam the undervaluation reduces growth. In contrast, dramatically increased since 1986 (table 1). Rodrik (2008) states that the growth-driven From 4.4 per cent of average GDP growth channel are the tradable sector, which rate in 1986-1990, it went up to 8.18 per cent contributes to innovations and productivity in 1991-1995, decreased its annual economic increases. For Vietnam, maintaining an growth rate to 6.95 per cent in 2006-2010 and undervalued currency could serve to subsidize 5.64 per cent in the 2011-2013 period due to its manufacturing industries, the driving force the global economic crises since 2008. behind that country’s growth. Although the country decreased its annual There are some national dummy variables growth rates in some recent years, the average (Rj) to describe how the effects of different annual growth rate of GDP in Vietnam still designations on economic growth. Rj takes presents at high growth rate (about 6.61 per the value of 1 if the observation belongs to a cent). This helped the country increase its particular timeline and 0 if it does not belong national income per capita over time. In 2013, to that catalog. It is expected that Vietnam the GDP per capita of Vietnam was US$1908, that has more economics relationship with three times of that in 2005 and more than other nations or international economic twenty times that of 1986 (GSO, 2013). groups in the world, it will see greater effect This achievement and the stable on economic growth than the other non- development of the society showed that the openness nation. chosen reforms of Vietnamese leaders were Data going in the right way, and the contents and The empirical analysis was presented by time implemented measures at the macro level series model. Annual data on all variables for were ensuring growth. 33 Hoàng Thị Thu Tạp chí KHOA HỌC & CÔNG NGHỆ 124(10): 31 - 37 Table 1: Average annual growth rates of GDP in Vietnam Of which Period Annual GDP growth Agriculture, forestry Industry Services rate (%) and fishery 1986-1990 4.44 2.72 4.82 5.84 1991-1995 8.18 4.12 12.02 8.60 1996-2000 6.98 4.40 10.64 5.72 2001-2005 7.48 3.84 10.24 7.04 2006-2010 6.95 3.45 7.85 7.67 2011-2013 5.64 3.11 5.95 6.43 1986-2013 6.61 3.61 8.59 6.88 Source: Vietnam statistical Yearbook, various issues The reason behind the achievements was the modernization. Vietnam's economy fast development of all economic sectors, transformed itself from being a primary sector especially the industrial sector. At the end of dependent economy to a more industry and 1988, the regulation 217/HDBT gave the services sector oriented one (Table 2). During state-owned enterprises (SOEs) autonomy to 1986-1990, agriculture, forestry and fishing do business and stated that the government factor accounted for 41 per cent of total GDP would no longer subsidies them. The SOEs output, and it decreased to 22.29 per cent in stopped receiving capital from the 2001-2005. Industry and services sectors have government budget for their activities and are higher shares of GDP - 39.44 per cent and now required to obtain bank loans and pay 38.27 per cent respectively in the first five interest. During the adaptation period, the years of the 21 century. Even though the industrial and construction sector grew at an share of the services sector decreased during average rate of 4.8 per cent during the period 2001-2005, several sub-sectors such as 1986-1990. However, after adaptation, the banking and finance, communication, import industrial sector expanded quickly, about trade, insurance and tourism grew faster than 12.02 per cent in 1991-1995 and about 8.59 previously. The change in the economic per cent during the 1986-2013 period. structure was in the right direction and Eventually it became the main source of suitable with the industrialization and economic growth (Table 1). The development modernization policy announced by the was the result of increasing inflows of foreign government. capital in heavy industries of gas, electricity, With an objective to develop a socialist- cement, steel, paper and agriculture oriented market economy under the State’s processing. Some key products of Vietnam’s management, the Vietnamese government industries are crude oil, gas, aquaculture kept the central leading role of the state sector processing, paper, garment, coal, textiles, while facilitating the development of other chemical, fertilizers, cement, iron and steel. economic sectors. As a result, the number of The service sector has been continuously state owned enterprise declined, while the increasing since 1988 and had a high growth GDP’s shares of the state sector did not rate (about 8.6 per cent) during the first half change much overtime. The number of the of the 1990s. This was due to open economic foreign owned and non-state enterprises is policies of the government. The rise was growing. However, the GDP’s share of the mainly from the improvement in foreign investment sector increased, from administration, banking reform, trade 1.14 per cent in 1986-1990 period to 18.56 liberalization and tourism. per cent in 2011-2013 and the proportion of Besides the increase in GDP growth rates, the non-state sector in GDP decreased from Vietnamese economic structure has also 63.6 per cent in 1986-1990 to 48.95 per cent shifted in the direction of industrialization and in 2011-2013. 34 Hoàng Thị Thu Tạp chí KHOA HỌC & CÔNG NGHỆ 124(10): 31 - 37 Table 2: Structure of GDP in Vietnam (%) Share of GDP by sector Share of GDP by ownership Period Agricultur Tota e forestry Tota l and Industry Services l State Non- Foreign fishery State investment 1986-1990 100 41.15 25.36 33.49 100 35.26 63.60 1.14 1991-1995 100 31.78 27.52 40.70 100 33.78 57.54 5.68 1996-2000 100 25.85 33.10 41.05 100 39.54 49.82 10.40 2001-2005 100 22.29 39.44 38.27 100 38.68 46.54 14.60 2006 -2010 100 20.55 40.27 39.18 100 35.48 46.64 17.89 2011-2013 100 19.38 38.28 42.34 100 32.48 48.95 18.56 1986-2013 100 26.83 33.99 39.17 100 35.87 52.18 11.38 Source: calculated from Vietnam statistical year book 2006 Table 3: Empirical results on economic growth Effect of FDI in Vietnam Dependent variable: Economic growth (GDP) Variable (1) (2) (3) (4) Intercept 0.0787 0.1441 0.1696 0.1229 (2.3043)** (3.5623)*** (2.5497)** (1.3574) Foreign direct investment (FDI) 0.0811 0.0847 0.0836 0.0693 (2.3913)** (2.4762)** (2.3415)** (1.8156)* Domestic investment (DI) 0.3757 0.3246 0.3052 0.3539 (6.0968)*** (3.8275)*** (3.1197)*** (2.9745)*** Human capital (HK) 0.0454 -0.0127 -0.0198 0.1777 (0.3271) (-0.0784) (-0.1179) (0.7393) Labor force (L) 0.3707 -0.8968 -1.1931 -2.2068 (0.1853) (-0.5018) (-0.6172) (-1.0911) International Trade (TRADE) -0.0468 -0.0778 -0.0817 0.0004 (-0.2466) (-0.4061) (-0.4194) (0.0022) Exchange rate (USD_VND) 0.3588 0.3581 0.3449 0.4526 (2.1694)** (2.0551)** (1.8270)* (2.4682)** Asian financial crises (D1998) -0.0407 -0.0381 -0.0821 (-1.5052) (-1.4142) (-2.1945)** ASEAN -0.0206 -0.0166 (-0.4666) (-0.3304) US 0.0807 (1.4431) R-square 0.8621 0.8663 0.8673 0.8826 A d j. R-square 0.8162 0.8113 0.8009 0.8122 DW statistics 1.8990 2.0180 2.0413 2.2775 No. of Obs. 25 25 25 25 Note: (1) The coefficient of the variable is shown first, followed by the t statistic is in parentheses (2) *, **, and *** indicate significance levels of 10, 5 and 1 percent, respectively (3) All variables are in first differences of natural log form except dummy variables (4)Method of regression: Ordinary Least Squares with White heteroskedasticity-consistent standard errors & covariance 35 Hoàng Thị Thu Tạp chí KHOA HỌC & CÔNG NGHỆ 124(10): 31 - 37 In short, after nearly thirty years of Doi Moi expansionary effects on economic growth. in 1986, Vietnam has recorded relatively high The result could be explained that the growth rates, which have increased from year devaluation of Vietnamese currency causes to year. The annual average GDP growth rate local goods to be cheaper abroad and this will in the 2001-2006 period of about 7.5 per cent enhance the cost competitiveness of satisfied the planned targets. The economic Vietnamese exports which are a component structure has gradually shifted along the lines gross domestic product, leading to an increase of industrialization and modernization, in exports and improve the country’s closely tied to the market for better efficiency. economic growth. Although the economic growth is increasing In order to assess whether human capital and in volume in Vietnam, the main determinant labor force are major determinant factors of factors of economic growth is still in economic growth in Vietnam, the human question. This will be addressed in the capital variable (presented skilled labors) and following parts of the research. labor force variable (presented less-skilled Empirical results labor factor) are included in the model. I assume that human capital and labor force Table 3 presents the estimation results of the have a positive relationship with economic main determinants of economic growth in growth in Vietnam. However, the results Vietnam. The results from the column (1) show that the coefficients of HK and L do not present effects of original determinant factors enter significantly and are negative; on economic growth. It shows that foreign representing that those factors are not yet direct investment, domestic investment and major determinant factors of economic exchange rate are positive and have growth in Vietnam. significant relations with the country’s The model also includes some dummy economic growth. As a result, if the growth variables in the model. I believed that Asian rate of domestic investment, foreign direct financial crises in 1997-1998 effects investment inflow and exchange rate goes up negatively on economic growth of Vietnam by 1 per cent, on average, the economic and the economic relationship of Vietnam growth rate increases by about 0.37 per cent, with ASEAN and American since their signed 0.08 per cent and 0.36 per cent, respectively. trade agreements could help the economic This means that although both depend on the growth in Vietnam. The econometric results foreign financial development and the present that the coefficients of ASEAN and exchange rate, the economic growth rate of US are insignificant; representing that those Vietnam is much more dependent on its factors are not greater effect on economic domestic financial development. The growth of Vietnam at the time of research. significant and positive coefficient of FDI The Asian financial crises factor has negative suggests that FDI has a positive effect on effect on economic growth in Vietnam. This Vietnamese economic growth. This result is could explain the situation that due to the consistent with the proponent of the FDI-led Asian financial crises in 1997-1998, the GDP growth hypothesis such as Romer (1990) and growth rates of Vietnam declined to 5.8 per Markiw-Romer-Weil (1992) and Zhang cent in 1998 and went down further to 4.8 per (2001). cent in 1999. From Table 3, the exchange rate presents the CONCLUSIONS AND POLICY IMPLICATIONS positive and significant effect on economic Vietnam’s economic growth has increased growth of Vietnam. This means that the dramatically since its renovation. The study depreciation of Vietnamese currency have aims to examine the determinant factors of 36 Hoàng Thị Thu Tạp chí KHOA HỌC & CÔNG NGHỆ 124(10): 31 - 37 economic growth in Vietnam by using time to enhance its economic growth. Policies that series model over the 1986-2013 period. This encourage both foreign direct and domestic study concludes that the foreign direct investments in physical capital as well as human investment inflow, domestic investment and capital, labor training and flexible international exchange rate are major and positive trade development would boost both short and determinants of economic growth in Vietnam. long term growth of Vietnamese economy. The financial crisis such as Asian financial crises is a dummy variable that effects REFERENCES negatively on economic growth in Vietnam. 1. Barro, R. J. and Sala-i-Martin, X., 1995. This find that even though Vietnam is a Economic growth. McGraw-Hill, Cambridge, MA. crowded population and human capital and 2. General Statistical Office (GSO), 1995-2013. openness to trade, many factors such as labor, Vietnamese Statistical Yearbook. Statistical Publishing House, Hanoi. human capital and international trade, do not 3. GSO (2005). Vietnam – 20 years of renovation exert independent determinants on Vietnamese and development. Statistical Publishing House, economic growth. Hanoi. 4. Makiw, N.G., Romer, D. and Weil, D.N. From the conclusions of the study, for Vietnam (1992). A contribution to the empirics of to increase economic growth, the policy of economic growth. The quarterly journal of depreciation to increase exports and economics 107, 407-37 employment in the economy might be the best 5. Romer, D. (1990). Endogenous technological policy for Vietnam. Moreover, the policies that change. Journal of Political Economy 98, S71-102 attract more foreign direct investment inflow 6. Zhang, K. H. (2001). How does foreign direct investment affect economic growth in China? into Vietnam and promote the domestic Economics of Transition / European Bank for investment in the country are still need to apply Reconstruction and Development 9, 3, 679-693. TÓM TẮT NHỮNG YẾU TỐ QUYẾT ĐỊNH ĐẾN TĂNG TRƯỞNG KINH TẾ CỦA VIỆT NAM Hoàng Thị Thu* Trường Đại học Kinh tế và Quản trị kinh doanh – ĐH Thái Nguyên Bài báo nghiên cứu các nhân tố quyết định đến tăng trưởng kinh tế của Việt Nam bằng việc sử dụng mô hình chuỗi thời gian trong giai đoạn 1988-2013. Nghiên cứu chỉ ra rằng đầu tư trong nước và đầu tư trực tiếp nước ngoài là những nhân tố có tác động tích cực và mạnh mẽ đến tăng trưởng kinh tế của Việt Nam. Ngài ra, tỷ giá hối đoái và khủng hoảng tài chính châu Á năm 1997 cũng là các nhân tố tác động đến tăng trưởng kinh tế của Việt Nam. Tuy nhiên, nghiên cứu chỉ ra rằng, nguồn nhân lực và ngoại thương chưa phải là kênh giúp cho Việt Nam tăng trưởng kinh tế trong giai đoạn nghiên cứu. Từ khóa: nhân tố quyết định, tăng trưởng kinh tế, FDI, đầu tư trong nước, Việt Nam Ngày nhận bài:15/8/2014; Ngày phản biện:29/8/2014; Ngày duyệt đăng: 15/9/2014 Phản biện khoa học: TS. Trần Nhuận Kiên – Trường Đại học Kinh tế & Quản trị kinh doanh - ĐHTN * Tel: 0989 910591 37