AN ANALYSIS AND EXAMINATION INTO VIETNAM’S ECONOMIC GROWTH POST-1986: TAKING ADVANTAGE OF THE OPPORUNITIES

Roman Derevyanko – Undergraduate Student

College of St. Benedict/St. Johns University

Working Paper

December, 2016

ABSTRACTThis research explores the contributing factors to Vietnam’s economic growth following its introduction of market-oriented political reforms beginning in 1986 (Doi Moi). In accordance with a Solow model growth model, elaborated to include more inputs, a growth accounting exercise will provide insight into the biggest contributors to Vietnam’s increase in output. While a growth accounting analysis will broadly explain the main contributions to this growth, a further analysis will attempt provide context for the reasoning behind the contributions. This paper will then examine the opportunities these contributions are presenting for businesses to take advantage of Vietnam’s economic potential.

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Keywords: Vietnam, FDI, Economic, Growth

1. Background: Vietnam’s Political Reform

“…we have made mistakes due to ‘leftist infantilism,’ idealism, and to the contravention of the objective laws of socio-economic development. These mistakes were manifested in the…[emphasis given to] developing heavy industry on large scale beyond our practical capacity…[maintaining] the bureaucratically centralizes mechanism of economic management based on state subsidies with a huge superstructure which overburden the infrastructure. As a result, we relied mostly on foreign aid for our subsistence.”

Prior to 1986, long-time party leaders Le Duan, Truong Ching, and Pham Van Dong were attributed to the prolonging calamities of the Vietnamese socialist state. Vietnam’s central planning and large-scale production had presented the nation with rising economic problems. Even with price controls on most goods and services, Vietnam’s annual rate of inflation was over 700%. The value of their imports was more than double the value of their exports. Budget resources were diminished due to high military expenditures as well as expenditure on unsuccessful state enterprises and their foreign investment was mostly nonexistent. In addition, the technology and development gap with neighboring nations had been increasing.

The passing of Party Secretary-General Le Duan in April of 1986 led to the brief appointment of Truong Chinh as acting Secretary-General of the Party. Truong Chinh had begun to realize the consequences of the party’s central planning system after visiting Vietnam’s countryside poverty in 1983 and was beginning to lean towards economic reform. In December of 1986 the Sixth Party Congress appointed Nguyen Van Linh to replace Truong Ching as Secretary General, as well, Do Muoi was elected as Prime Minister and replaced Pham Van Dong and solidifying a reformist movement, titled Doi Moi (literally: “renovation”).

Doi Moi presented intense debate amongst party officials regarding the effectiveness of past policies in helping the Vietnamese people’s wellbeing but nonetheless pushed forward policy reforms. The Sixth Party Congress agreed towards reducing macroeconomic instability and accelerating economic growth by utilizing all economic tools available including fiscal and monetary policies. In addition, Vietnam’s centralized bureaucratic management system built upon state subsidies was eradicated and transitioned into a multi-sector, market-oriented economy allowing the private sector to compete with state enterprises. The limited public investment that was available was distributed amongst three main goals: development of agriculture, expansion of consumer good productions, and expansion of trade and foreign investment relations.

The objectives of Doi Moi continued to follow through in the form of steady easing of government constraints to private sector activity and domestic trade. In early 1987, the reform-oriented leadership implemented measures to increase the private sector, reduce the budget deficit, and boost the output of agricultural and consumer goods in order to raise market supplies and exports. This aimed to make prices more responsive to market forces, which would allow Vietnamese producers to make profits. Some of the steps that were taken to accomplish this included lowering barriers to trade, the checkpoints inspection system that required goods in transit to be frequently inspected was abolished, and regulation on private inflow of money, goods, and tourists from overseas were relaxed. Furthermore, wage increases were planned within the state-controlled industrial sector, reductions of workers in the overstaffed state administrative and service organizations were planned, and a restructure of the tax system to boost revenue and improve incentives was introduced.

-Truong Chinh, 1986

The first year of reform marked the key changes of the Vietnamese government towards reducing their control over the industrialization process. From there many changes were enacted leading towards a more free-market oriented economy. In 1986 and 1988, Vietnam drastically reduced the number of line ministries, state committees, and other central government agencies. Other notable changes were made including the “Foreign Investment Law” passed by the National Assembly in late 1987 and enacted in 1988. A Law on Land was also passed by the National Assembly in the same time which recognized private land use and was aa crucial step towards the introduction of property rights. The radical reforms beginning in 1986 and 1987 continued from thereon, for more details see Table 1 in the appendix1.

The reformist movement in Vietnam clearly showed positive signs for the country. The changes resulted in some of the largest annual economic growth in the 1990’s at an average 7.9% and a decrease in poverty from 58.71% in 1992-1993 to 37.4% in 1997-1998 (Glewwe and Dang, 2011).

2. Introduction

Vietnam’s political reforms have paved the way for an impressive rate of economic output. After the enactment of Doi Moi gradual, yet quickly acting, movements towards a market-oriented economy aimed at resolving a struggling economy in crisis from bureaucratic centralism and an inefficient state subsidy system. What followed, with the exception of the 1997 Asian Financial Crisis, was impressive growth in Vietnam’s gross domestic product.

Although the increases in output relating to the GDP is clear, what isn’t, are the sources from which these increases came from.

To identify the contributing factors it is crucial to first understand the models used to measure economic growth. The next section explains the history and contributions made from economists into economic growth theory and analysis. The main focus will be on the Solow growth model and the 1 The above reform summary came from chapter 6 of Brian Van Arkadie and Raymond Mallon’s 2004 book titled, “Viet Nam: A Transition Tiger?”

Source: World Bank

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Figure 1: Vietnam's Gross Domestic Product 1997 Asian Financial Crisis Gross domestic product per capita Gross domestic product

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ange

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subsequent altercations of it to include more accurate factor contribution measures. Ultimately, a growth accounting exercise is performed to identify the share of physical capital, labor, human capital, and total factor productivity’s (TFP) contributions to output.

With insight into what share contribution each input has to Vietnam’s output growth an examination of the sources of these increases will follow. Looking into the sources of domestic and foreign investment allowing for the capital increases will provide insight into capital’s share. Labor increases and the increasing rate of an educated labor force will provide an examination of how labor productivity has increased post Doi Moi and contributed to a larger share of output growth. Lastly, explaining the total factor productivity increase will pose to be the most difficult portion of the examination. Total factor productivity measures everything that isn’t included in physical capital, labor, and human capital. To this effect, TFP leaves many potential areas of examination to be explored. In this analysis the focus will be on increases in TFP from movements into more economically productive industries, as well as, the urbanization that accounts for a more productive labor force.

3. Methodology and Literature Review

The purpose of this research is to examine main streams contributing to Vietnam’s growth after it’s political restructuring beginning in 1986. To this effect, the fundamental approach to understanding a nation’s economic progress was introduced by Robert Solow in his 1956 paper titled “A Contribution to the Theory of Economic Growth.” This neoclassical growth model, coined the “Solow model,” expands upon the production function in the Cobb-Douglas form2, which describes output growth based on capital and labor contribution and is given by

Y=K α L1−α

where Y denotes output, K is capital input, L is labor input, and α is a number between 0 and 1 representing the share of capital and labor to output with decreasing returns to all capital.

In 1957, Solow introduced technological progress to the production function in his paper titled “Technological Change and the Aggregate Production Function.” Prior to introducing technological progress, diminishing returns to capital accumulation provided inaccuracies in measuring economic output. By introducing technological progress to the production function, improvements in technology progress continuously balances the diminishing returns to capital accumulation. As a result, labor productivity grows because of the direct improvements in technology and indirectly because of the additional capital stock made possible by technology progress. With the addition of a Hicks-neutral3 productivity term, Solow provided an empirical accounting for components of growth, called “growth accounting.” This breaks down growth in output into growth in capital, growth in labor, and growth in technological change revealing the production function

Y=A K α L1−α

where A is a Hicks-neutral productivity term (Solow 1957). The Solow model with technological progress can fundamentally accomplish identifying the

sources of economic growth. However, leaving the Solow model at this can often misrepresent a nation’s sources of economic growth. As Alwyn Young points out in his 1995 paper appropriately titled “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,” East Asian countries (Singapore, Hong Kong, Taiwan, and South Korea) experienced large rates of economic growth between 1966-1990, however, their respective TFP did not grow at a rate as high as other

2 Charles Cobb and Paul Douglas introduced the Cobb-Douglas production function in 1928. The two argued that in their analysis of the US manufacturing industry the production function, with an α value of ¼, the data well without technological progress being added (Jones and Vollrath, 2013).3 The Hicks-neutral productivity terms states that the ratio of A remains the same for a given capital labor ratio.

countries experiencing smaller growth rates. Young concludes that increases in capital, labor, and a shift from agriculture to manufacturing (a TFP contributor) are not enough to explain the rapid growth rates in these East Asian countries. The increases in investment into a population’s education were a key contributor to the East Asian nation’s economic growth. To this effect, the Solow model can provide a better insight into Vietnam’s growth if the effectiveness of labor output is introduced, known as human capital.

In 1992, Mankiw, Romer, and Weil supplemented the Solow model with human capital. The model restricted human capital to being a function of the investment in education, ignoring investments in things such as health. This gives the Cobb-Douglas production function the following new form:

Y=K α H β ¿where H is human capital, AL is productivity-augmented labor (Hicks-neutral), and α and β is the share of physical and human capital to output, respectively. This suggests that the production function exhibits constant returns to scale. Human capital also accumulates similarly to physical capital where decreasing consumption and increasing saving raises both physical and human capital. The increase in human capital, therefore, increases output per worker and in turn economic growth. Taking the logs and differentiating the production function with human capital and technology the formula for growth derive as accounting

YY =(α K

K )+((1−α−β ) LL )+(

β∗HH )+(

AA )

where output growth (YY ¿ is equal to the weighted average of capital (α K

K ¿ plus labor growth (

(1−α−β ) LL ¿ plus human capital growth plus (

β∗HH ) the growth rate of technological progress, also

known as total factor productivity ( AA

¿. The growth accounting exercise implies decreasing returns to all

capital where α +β<1. If α +β=1 then there are constant returns to scale in the reproductible inputs. While this variation of the Solow model now includes human capital, the measurement of human capital varies across growth accounting exercises.

4. Vietnam’s Growth Accounting

By briefly introducing the methodology behind growth accounting, examination of the sources contributing to Vietnam’s economic growth can now be performed. In this analysis, the growth accounting formula is:

YY

=(α KK )+((1−α−β ) L

L )+( β∗HH )+( A

A )where α=1

3 and is the fraction of output that is appropriated to capital (for example, in profits and

depreciation), 1−α−β ≈ 13 and is the fraction of output that is appropriated to labor (wages), and β=1

3

and is the fraction of output that is appropriated to human capital. This formula shows changes in factor contribution to output in regards to time and can be simplified and rewritten as

% ∆ Output=( 13∗% ∆ Capital)+( 1

3∗% ∆ Labor)+( 1

3∗% ∆ HumanCapital)+% ∆ Total Factor Productivity .

In this simplified analysis, data for output, capital, labor, and human capital is collected and inputted to calculate Vietnam’s TFP contribution. Output is collected using data on real gross domestic product (real GDP). Capital stock is multiplied by 1 – the average depreciation rate of the capital stock at time t and used to estimate the factor contribution of capital. The number of persons engaged, or any person 15 years or older who worked during the reference week, is used for the factor contribution of labor. All of the aforementioned data was gathered from the Penn World Tables (PWT) version 9.0 (Feenstra, Inklaar, and Timmer, 2015). In combination with the PWT, the human capital equation is derived in James and Vollrath’s book (pg. 55-57, 2013) and takes the following form:

H=eψ∗u Lwhere ψ is a positive constant estimated to be 0.10 and u is a human capital index estimated by PWT using data on the average years of schooling from Robert Barro and Jong-Wha Lee4 (Barrow and Lee 2010) and an assumed rate of return to education around the world based on a Mincer5 equation.

As with any growth accounting exercise, the parameters can be expanded to allow for different types of physical capital, raw labor, and human capital. Nonetheless, even in this simpler form, there is clear evidence that the capital stock’s share of output growth has been prominently shaping Vietnam’s economic development. Labor, human capital, and TFP are all less than 20% of the capital’s share while physical capital’s is over 50%. Further examination of the contributing factors is necessary to better understand the origins of Vietnam’s economic growth.

Table 1Growth Accounting Vietnam (1985-2014)

Contributions from

Year Change in GDP K L H TFP1985 5.32% 26.68% 78.36% 78.68% -83.72%1986 3.25% 41.13% 54.91% 53.51% -49.55%

4 The growth accounting formula, YY

=α KK

+ (1−α ) LL+ A

A , introduces variables with a “dot” notation. In

regards to derivatives with respect to time, the dot is used to represent this. For example, dKdt

=K .5 The weights of α are generally estimated from national income statistics and reflect the income shares of capital (and labor from 1−α ¿. Mankiw, Romer, and Weil showed that in the US the average manufacturing wage has roughly been twice the minimum wage. If minimum wage is compared to raw labor it can be suggested that roughly half the wage of a typical worker is compensation for raw labor and the other half is the return on human capital. This would mean that physical capital, human capital, and raw (unskilled) labor would then all be around 1/3.

Shares Contributing

Total Factor Productivity (A)

Physical Capital (K)

Capital Stock,

Human Capital (H)

Effective Output (Y)Real GDP

Workforce (L)Population 15+

Working

Source: Penn World Tables Version 9.0

1987 2.49% 59.85% 28.11% 26.35% -14.31%1988 4.85% 27.72% 12.76% 11.87% 47.65%1989 4.48% 25.30% 9.37% 8.41% 56.91%1990 4.85% 43.52% 32.14% 31.01% -6.67%1991 5.63% 29.44% 13.99% 15.57% 41.00%1992 7.96% 34.70% 11.96% 12.95% 40.39%1993 7.47% 49.33% 13.32% 14.39% 22.97%1994 8.12% 53.13% 12.25% 13.25% 21.36%1995 8.71% 50.49% 11.70% 12.64% 25.17%1996 8.54% 51.91% 7.90% 9.10% 31.09%1997 7.54% 56.67% 2.46% 3.83% 37.03%1998 5.45% 77.62% 22.64% 24.63% -24.89%1999 4.56% 80.78% 21.98% 24.38% -27.15%2000 6.36% 56.19% 2.31% 4.02% 37.48%2001 6.45% 54.79% 7.18% 9.33% 28.70%2002 6.61% 53.93% 13.34% 15.51% 17.22%2003 6.84% 52.13% 10.60% 12.74% 24.53%2004 7.01% 49.41% 11.39% 13.52% 25.68%2005 7.02% 53.20% 10.97% 13.14% 22.68%2006 6.52% 50.57% 13.72% 16.09% 19.61%2007 6.66% 58.13% 13.65% 16.02% 12.21%2008 5.36% 65.04% 19.46% 22.48% -6.99%2009 5.12% 65.91% 3.56% 6.71% 23.82%2010 6.04% 56.33% 16.22% 19.00% 8.44%2011 5.87% 44.78% 10.16% 13.32% 31.74%2012 4.99% 48.43% 14.64% 18.57% 18.37%2013 5.14% 45.79% 10.60% 13.88% 29.73%2014 5.65% 43.21% 6.97% 9.52% 40.30%

1985-2014 Average 6.05% 51.01% 14.49% 16.06% 18.43%

The appendix (Appendix B) provides the derivation in per worker terms, which will assist in understanding the underlying impacts each factor’s contribution has on a macroeconomic level.

5. Physical Capital

With capital being the largest factor contributing to Vietnam’s economic growth, it should not come with surprise that in the first 5 years following the introduction of Doi Moi Vietnam saw an 18.6% increase in total investment in comparison to the 5 years before, even with the state budget for government investment being 6% less (Arkadie and Mallon, 2004). Increased capital comes from the investment of saved money on capital goods such as factories, machines, and computers, amongst other things. The use of capital raises labor productivity through increased production efficiency, or output per worker. Capital can also be a contributor to increasing TFP through the sharing of technological

innovation6 present in the new capital and bridging the gap between advanced and developing economies. An investigatory approach towards identifying the sources of capital growth will look at capital from domestic and foreign investment.5.1 Domestic Investment

Within domestic investment, contributing factors can be broadly broken into private investment and government (public) investment. By subtracting final consumption expenditure from GDP, the gross domestic savings rate provides insight into shifting habits in private investment. Gross domestic savings contributes to increases in capitals stock by depositing savings within banks. In turn, banks invest the deposited savings into capital through loan operations and that end up in the form of capitals stock through things such as plants or machinery. In 1986, the gross capital savings as percent of GDP was 4.5% and 29 years later it had increase by 640% to 28.5%. This surge in saving is echoed by the increase in non-state (private) investment,7 from 1986-2014 non-state investment had an average annual growth of 18.60%. State (public) investments during the same time saw an average annual growth of 16.22% while (General Statistics Office of Viet Nam).

A more cumulative measurement to look at capital increases can be seen in gross domestic investment (GDI), otherwise known as capital investment. GDI measures increases in expenditures on additions to fixed assets (plants, machinery, equipment, etc.), including land improvements (fences, drains, etc.), plus net changes in the economy’s level of inventories. Prior to experiencing repercussions from a worldwide economic downturn, from 1986-2007 GDI’s average annual growth was 4.92%.

With consideration to political reforms, it wasn’t until 1994 with the passing of “Law on Promotion of Domestic Investment”, nearly a decade after Doi Moi, that a noticeable step towards private investments incentives was taken (Arkadie and Mallon, 2004). Although the new government did aim to increase private investment, there is no single political source to explain such growth in private investments. Instead, the overall movement towards a market economy has provided the population with a higher standard of living. Data on poverty gaps at $1.90 a day and $3.10 a day counts non-poor as receiving at least the $1.90 or $3.10 a day, respectively.

6 Barrow and Lee provide educational attainment data for 146 countries from 1950 to 2010. The data is disaggregated by sex. In this 2010 data, estimation accuracy was increased through using consistent census data, disaggregating data by age group in 5-year intervals, and introducing new estimates of mortality rates and completion rates by age and education level. Average years of schooling, st , is found

by st= ∑a=1−13

A

ltg s t

a where ltg is the population share of group g 15 years or older and st

a is the number of

schooling years by age group a (a=1: 15-19 years old, . . . , a=13: 75≥). Years of schooling by age

group, a, at time, t , is calculated by sta=∑

jh j ,t

a Dur j ,ta

where h ja is the fraction of group ahaving reached

education level j ( j = primary, secondary, tertiary), and Dur is the corresponding duration in year. 7 George Psacharopoulos’ (1994) paper accompanies Barrow-Lee in estimating PWT’s human capital index by using rates of return for completing different sets of years of education. To simplify, the methodology used to estimate these returns are based on a Mincer equation using a semi-log ordinary least squared regression where the natural logarithm of earnings is the dependent variable and years of schooling and potential years of experience in the labor market are independent variables. This basic

earnings function takes the form of β=∂ lnW∂ S

= Relativeearnings differentialEducation differential where β is the

coefficient on years of schooling,lnW is the function of log-wages, and S is the years of schooling.

Source: World Bank

Source: World Bank

Looking at the available data for the poverty gap suggests that a large portion of the increase in private investments can be explained by the overall increase in people’s income after the Doi Moi.5.2 Foreign Investment

The Foreign Investment Law was approved in 1987 and implemented in 1998. After a few years, large inflows of foreign direct investment (FDI) came to Vietnam and in 1992 it became the main source of investment. The net inflow of FDI as a percent of GDP in 1987 was 0.03% and hit its high of 11.94%. The annual growth rate (based on the balance of payments) of FDI net inflows was as high as 95.45% in 1993 and 109.92% in 1994. With the 1997 Asian financial crisis, Vietnam saw significant of FDI growth rate decline from 1991-1999. This slowed the FDI growth rate down from 35.42% in 1996 to -24.73% in 1998 with only positive growth being seen again at the miniscule rate of 0.15% in 2001. The years following 2001 saw positive growth rates and hit 179.17% in 2007 but did not last and fell to 49.27% the following year and -20.66% in 2009 (World Bank). It can be pointed out that the FDI inflows around the time of 2007 can be attributed to changes in laws to comply with the World Trade Organization, which Vietnam would join in 2007. This was seen through the allowance of foreign investors to invest in some previously government monopolized industries, most notable banking, electric supply, insurance, and communication (Thuy et al., 2015).

An investigation may be necessary to further understand how capital became such a large share of Vietnam’s growth when FDI has seen such volatility, even with impressive growth rates at times. Other sources of foreign investment increases can be seen with foreign government aid designated to promote economic development (ODA). In 1933 Vietnam repaid their outstanding loans to the International

1992 1998 2002 2004 2006 2008 2010 2012 20140

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Figure 2: Vietnam's Poverty Gap

Poverty gap at $1.90 a day (2011 PPP)

Poverty gap at $3.10 a day (2011 PPP)

Per

cen

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Un

der

(%

)

Monetary Fund (IMF) through lenders in the Paris Club8, which allowed for Vietnam to further take loans from the IMF and World Bank. Following 1933 Vietnam negotiated with lenders from the London Club9 to lower their outstanding loans by 50% and allow for a longer repayment period. These steps provided opportunities for ODA from European countries and Japan, amongst others (Thuy et. al., 2015). In 1986 Net ODA received per capita was 3.18 and in 2014 it had reached 46.49. Another factor worth looking into is the increase is that from 2000 to 2014 remittances as a percent of GDP grew 161.79% (World Bank). The financial support from these channels upgraded infrastructure and reduced poverty, in the case of ODA, but also encouraged private and foreign investment.

6. Labor and Human Capital

On average, labor from 1985-2015 has accounted for 14.5% and human capital has been 16% share of contribution to output, respectively. The increases in both of these factors signify more contribution to economic growth from the part of the population working, and their effectiveness.

8 The topic of investment, specifically foreign investment, leading to increase in the growth of technology is disputed amongst economists searching for a definitive model, (or even using the Solow residual as an accurate measure) and will not be investigated in this paper. Some insight into this is provided in Basu, Fernald, and Shapiro (2001) and better modeled in Romer’s (1989) “Follower-Leader” model. 9 The data provided for non-state and state investment is from the General Statistics Office of Viet Nam and does not include foreign investment in their data. This is purely private and public investment (in current billion Dong).

19841986

19881990

19921994

19961998

20002002

20042006

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20122014

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55

0

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2

2.5

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Figure 3: Labor and Human Capital

Persons Aged 15+ who Worked

Human Capital Index

Nu

mb

er o

f Peo

ple

(m

illi

ons)

Hu

man

Cap

ital

(b

ased

on

yea

rs o

f sc

hoo

lin

g an

d r

etu

rn)

19861988

19901992

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250000

300000

350000

400000

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500000

0

10

20

30

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60

70

80

90

100

Figure 2: Sources of Vietnam's Investment (1986-2015)

State Invesment (Current bil. Dong)Non- State Investment (Current bil. Dong)Denotes EstimatesGross Domestic Investment (% of GDP)Gross Domestic Savings (% of GDP)

Curr

ent

Bil

lion

Don

g

Per

cen

t of

GD

PSo

urce

: Wor

ld B

ank

Sour

ce: G

ener

al S

tati

stic

s O

ffice

of V

iet N

am

Source: World Bank

Source: Penn World Tables Version 9.0

6.1 LaborLabor contributes to economic growth because, simply, there are more people producing output.

From 1984 to 2014 the amount of people 15 or older that have worked increased 122%. There is not much examination of this necessary at this time as its contributions are explained quite simply in its increase from the data. Further research can look into better understanding this input by adding more factorial contributions to labor from things such as the average hours worked by the labor force over time.

6.2 Human CapitalAs mentioned in the physical capital section, increases in capital increases in output per worker.

In the same way, increases in human capital through, in this case, education and return on education contributes to increases in output per worker through higher labor productivity. While the labor from 1984-2014 has increased by 122%, during the same time the human capital index as defined by PWT has increase 49%. Essentially, the labor in Vietnam has become 49% more effective in labor output during this time.

6. Total Factor Productivity

Total factor productivity is the portion of output not explained by the amount of inputs used in production. Even amongst the pioneers of growth accounting, it has been clear that this output provides us with little insight into the production of the economy. As Moses Abromovits put it in his 1956 paper, it is “a measure of our ignorance.” However, by including things such as human capital, the TFP is better explained by taking a portion of the measurement out and dedicating it to the increase in a more educated labor force.

There are other things that could help in explaining TFP, such as the population’s increase in more productive regions of Vietnam. The decreasing in rural populations towards urban regions can provide context for this. Moreover, this does not necessarily mean that people are physically moving, rather, as the economy grows and investments into particular regions are made the area becomes identified as urban based on government’s requirements. Vietnam’s total population has been increasing, which also explains the increasing labor force in the previous section; however, rural population has been decreasing

19801982

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20082010

20122014

0

10000000

20000000

30000000

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80000000

90000000

0

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0.9

1

Figure 4:Vietnamese Population Dispersion

Population, total Rural Proportion of Total Population

Urban Proportion of Total Population

Pop

ula

tion

Pro

por

tion

of T

otal

Pop

ula

tion

19841986

19881990

19921994

19961998

20002002

20042006

20082010

20122014

15

20

25

30

35

40

45

50

55

0

0.5

1

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2

2.5

3

Figure 3: Labor and Human Capital

Persons Aged 15+ who Worked

Human Capital Index

Nu

mb

er o

f Peo

ple

(m

illi

ons)

Hu

man

Cap

ital

(b

ased

on

yea

rs o

f sc

hoo

lin

g an

d r

etu

rn)

Source: World Bank

Source: World Bank

.

Taking into consideration that urban regions are more productive, further investigating into the sectorial changes in Vietnam’s output will provide context for this claim. Firstly, contributing share from an industry can be described in simplest form as

Y t=∑t

θt , λ t εt∗TFPt

where θ is the industry share of output for agriculture, λ is the industry share of output for services, and ε is the industry share of output in industry (including manufacturing).10

The data shows that agricultural production post Doi Moi has been consistently decreasing beginning its decline in 1988 when agricultural value added (in 1986, limited investment stock was first put towards agriculture) as a percent of GDP was 46.3% and in 2015 it was a mere 17%. The decline in

10 The Paris club is a group of delegates from major creditor countries who assist in resolving payment difficulties experienced by debtor countries coordinated with sustainable solutions.

19801982

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Figure 4:Vietnamese Population Dispersion

Population, total Rural Proportion of Total Population

Urban Proportion of Total Population

Pop

ula

tion

Pro

por

tion

of T

otal

Pop

ula

tion

19851987

19891991

19931995

19971999

20012003

20052007

20092011

20132015

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45

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Figure 5: Sectorial OutputAgriculture Industry Services

Val

ue

Ad

ded

(%

of G

DP

)

agricultural production accompanies the decline in rural population as Vietnam’s production is becoming more efficient in its labor productivity by moving its labor force towards services and industry. Interestingly, industry and services declined in 2010. In 2010, the FDI growth rate was -16.55% suggesting that FDI investments are heavily concentrated into these sectors, with agriculture scarcely feeling a decreasing in output.

6. Conclusion

This paper looks into the shares contributing to Vietnam’s output growth after its political reform from 1986-2014. By taking into consideration the shares of factor contribution from physical capital, labor, human capital, and TFP from a growth accounting exercise based on an altered Solow growth model further examination into the source of these contributing shares in conducted.

The findings from growth accounting showed that the majority of output came from increases in capital stock. With an average annual growth of 18.6% in non-state investment from increased gross saving from 1986-2014 combined with an average growth of 16.22% in state investment during the same time, much of the capital came from domestic sources. Moreover, FDI has been a key contributor to capital stock increases in Vietnam with annual growth rates of net inflow FDI being as high as 109.92% in 1994. Other notable sources were increases in net ODA and the recent increase in remittances to Vietnam increasing the savings rate.

The labor force in Vietnam has been gradually increasing which on its own has contributed to more output. However, the labor force is also becoming more educated and effective at output. Overall, Vietnam’s labor grew 122% from 1984 to 2014 and has become more efficient along the way.

Lastly, identifying the source of TFP proves to be difficult for any economy. In this investigation, the TFP contributions could be accounted for the urbanization of the Vietnam’s population. While population has been consistently growing, the percent of the population in rural areas has been declining and urban population increasing. Urban areas tend to show have more productivity on a per person basis. Meaning, labor productivity per person in rural areas is less than in urban areas. This is also supported through the sectorial shifts in output. Much like rural population can stunt productivity on a per person basis, the same can be said about the productivity in agriculture compared to industry of service productivity.

In conclusion, this paper provides a crude analysis and examination into Vietnam’s economic growth. As this is a working paper, a further investigatory approach will be taken to identify the opportunities present for businesses with consideration to the factors contributing most to Vietnam’s growth. With many firms taking steps to further expand their portfolio in Asia past China, Vietnam provides flourishing opportunities for all to take advantage of.

Appendix

Appendix A

Appendix B

Appendix BThe production function with technological growth and human capital can be turned into a per

worker production function by dividing labor on both sides:Y t=K t

α H tβ A Lt

1−α−β

⋮Y t

Lt=

K tα H t

β A Lt1−α−β

Lt=At ¿

⋮y t=A t k t

α htβ

where new variables are defined as y=¿ output per worker, k=¿ capital per worker, h=¿ human capital per work all t time.

Sources: The following table was taken directly from Arkadie, Van, and Mallon (2004), their summary was gathered from: Government of Vietnam, Communist party of Vietnam, World Bank, and Asian Development Bank reports on reform processes.

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